CSTR - Coinstar

[yadayada]

The other advantage is they function as billboards. You missed guardians of the galaxy int he cinema? Probably forgot youw anted to see it, and now you walk past these things and see it for 1.5$. The minor hassle of bringing it back is worth 2.5$ saved probably.

 

And not sure how much this means, but it seems that he at least thinks about return on capital:

Di Valerio: You bet. We do capital allocation on a holistic basis. You first take a look and say, "OK, I need to invest in my core businesses to continue to grow them, both from new innovations into the core businesses, as well as the existing. I need to invest in new businesses" -- like we've been talking about -- "to bring new concepts into the marketplace, and then also in infrastructure in the corporation."

 

You calculate out what those returns are, and also returning money to the shareholders through share buyback. We'll continue to do that. We balance those out to make sure that we're doing it in a smart way, but a way that really does drive the highest return.

 

Four years ago, our return on invested capital, for example, was in the low single digits. Last year we finished out at 18.3%.

 

Austin: Congratulations.

 

Di Valerio: It's a nice focus for us to continue to do that, and as we try to grow out this business -- and we've talked about doubling the size of the company over the next five years -- we're going to do that while getting our return on invested capital up to 20%, which isn't necessarily the easiest thing to do, but that's how we stay in this very structured and balanced approach to getting returns for our shareholders.

[DanielGMask]

Since I'm DanielGMask I certainly don't agree about my comment being misguided. Here's why:

 

The only reason DVD rental is cheaper than VOD/Streaming/Similar services is because the studios have set it that way -for now- and your hypothesis is assuming that will continue, which may or may not.

 

If you have to buy a DVD for 25 dollars you can rent it for 1 or 1.5 and make money after a few rounds, but if you have to pay a big amount for the rights to distribute content, then that ball game is very different. But what would happen if the studio lets you set the price for renting that content via streaming/VOD and share the revenue (movie theater's model), or if the studio gives you a sooner window than DVD; then you may become the cheaper alternative.

 

The price of VOD is not higher than DVD rental because of a fixed cost related to the provider, but for one related to the studio and that may change whenever the studio thinks it's convenient.

[siddharth18]

 

The only reason DVD rental is cheaper than VOD/Streaming/Similar services is because the studios have set it that way -for now- and your hypothesis is assuming that will continue, which may or may not.

I don't think studios have ANY direct say on how DVD rentals are priced. The price is solely determined by redbox (based on their DVD costs, and their ROI objectives). If studios had their way, they'd try to get Redbox off the market (there was a lawsuit about it a few years ago...but as we know, redbox still exists...thanks to the first the first sale doctrine).

 

VOD/Streaming on the other hand is in complete control of the studios. While DVD sales are declining, it's a very high margin business and the studios have chosen (thus far) to milk it all they can. They see ALL movie rentals (DVD and VOD/streaming) as cannibalistic to their DVD sales. So the last thing they want is to let iTunes/Amzn "set the price for renting that content via streaming/VOD and share the revenue."

 

 

Can you imagine what price Amazon would set if it were within their control? They'd likely sell at a break even and imagine what their break-even cost would be...when they own one of the biggest content distribution/server farms in the world (Amazon AWS).

 

 

I'm long OUTR...it seems like a rollercoaster ride with each passing quarter. I wonder what it'll actually take for the underlying sentiment to shift and by this I mean, what will it take for the shorts to realize that this is a risky short bet as so much as already been priced in.

 

 

In the meanwhile though, I'm happy to have a nice FCF yield on my cost basis and see how the story unfolds...

[mateo999]

Yeah, again, Daniel... misguided.  Studios set TVOD pricing, and have no say on DVD pricing.  Some MSOs offer 48 rental windows for certain TVOD content-- guess what?  That was a negotiation with a studio.  I'm not sure if you're implying that OUTR is paying $25 for disc, but that's off base.  I peg it at less than $10 on average.  The price they pay per disc (except for with Disney where there's no relationship) is based on how it performed at box office.  Why in the world would studios reduce TVOD pricing?  They think that redbox is significantly de-valuing its content, and they're fighting an uphill battle in getting theater seats filled.  Lowering TVOD pricing is economically irrational- but i'm happy that there are those that disagree and are short on that thesis because I think logic will lead me to a satisfactory return.  By the way, TVOD pricing has been on the upswing among some MSOs.

 

The only way studios can kill off Redbox in a first sale doctrine world is by ceasing to press discs.  This is a risk I pointed out in my post.  Also, should studios kill their agreements with Redbox, it will make Redbox's life a lot harder to buy content.  It's my understanding that Ingram Entertainment (which just bought the #2 DVD/BR/VG wholesaler) doesn't do business with Redbox due to legacy threats of the studios pulling all content from Ingram.  People have speculated that it can crowdsource DVDs at retail... maybe.  Seems complex though.  Ultimately Mark Horak and the new Head of Content Mike Saska hires show me that Redbox is doing everything it can to work with the studios in as a collaborative manner as possible.

[DanielGMask]

For now with digital streaming all bets are off.  As you correctly mentioned, the first-sale doctrine does not apply. For DVDs, the rights are unlimited and costs are constrained. For digital, rights are constrained and costs are unlimited -but again, for now-. In the absence of the first-sale doctrine, VOD/Streaming providers must negotiate each and every title, and the price of the right to stream that digital title is up to the whim of the content owner, which you correctly pointed out.

 

By the way, for many titiles you can't even obtain digital rights, but I think that'll change sooner than later and I don't think the Studios will retain all the leverage, nor companies like Amazon; there will be some sort of equilibrium as it is with movie theaters and Studios.

 

DVD sales still are a good portion of the pie and one of the greatest ways to promote content, but that star used to be brighter and if its shine diminishes much more you may see how easy is for the studio to change the windows and pricing structure of the industry.

 

By the way, what portion of the revenue and of net income represents Redbox for Outerwall?

[mateo999]

For now with digital streaming all bets are off. 

 

Not my bet.  My bet is that studios don't engage in a race to the bottom of TVOD pricing which will only do them economic harm

[yadayada]

it is about 70m and growing for coinstar and about 220-230m for Redbox. But they are expanding coinstar in banks now, and expanding ecoatm so FCF is actually lagging behind 300m. Ignore depreciation because useful life of machines is 5 years. But a lot of machines last 10+ years. Some even close to 20.

 

I disagree with for now on cheap online rentals. If you look at dvd retail sales of top titles, they are flattening out .

 

Top 100 DVD titles sales in the US for retail is 2.3 billion$ in 2011, 2.3 billion in 2012 and 2 billion in 2013.

 

But bluray top 100 sales were 1.7 billion$ in 2013 and still growing in 2014 so far for about 10% first half. They have roughly 50% margins on these things, and it isn't really slowing down very fast.

 

And if you look at top 20 titles then dvd sales are roughly flat at 1 billion$ the last 3 years, and blu ray is  at 1 billion$ and growing in 2013.

 

The only dvd sales that are collapsing are older and more unknown titles. So for top 100 titles (most new release titles each year) , that is a 1.8 billion$ cash cow.

 

And there were rumors that VOD prices are actually going up. Also there are other release windows like hotels and airlines that they make a killing on the first few months after cinema's. They could never come close to this by cheap streaming. Why give it away for cheap if you can charge a lot of money and make more when the demand is there at higher prices? Redbox is basicly a lucky short cut around this, and that is why they still are going strong.

 

And unless disc sales collapse further (no signs of that so far) redbox will have negotiating leverage over studio's.

 

If you look at what would happen at 2$ online rentals. in 2013 redbox had 750m rentals. Let's say they can do double that with online rentals. That is 3 billion$. Or probably a bit over 2 billion in profit (netflix spends 25% of revenue on non content costs) in the most optmistic scenario. Given that this kills of most dvd sales, VOD airliner +hotel sales, they probably gain 2 billion$ a year if they are lucky, and give up a cash cow of at least 3-4 billion$. So I doubt this will happen.

 

Basicly studio's have pricing power and outerwall has a short cut around this. So you will not see this end for some time to come. 

 

And it is self sustaining in a way.

[DanielGMask]

Yeah, again, Daniel... misguided.

 

Non offense taken with that "misguided" word you like to use so much with me and which by the way is wrong again. What do you mean when you say that studios have no say in DVD pricing? The studios own the content and are able to release it or not to any platform they choose, as well as deciding when to release it in each platform, so they do have a say with any platform that distributes their content.

 

DVD's are one of the first windows after movie theaters because the studios like the money produced by selling the DVD at a high price, which by the way they set for Walmart and many other retailers. The model for companies like Redbox, Netflix's DVD business line, the now almost dead Blockbuster, or one of my own companies www.videomatic.com, is different but similar to that of the retailers, it all depends on the purchasing power of the intermediary.

 

But be sure that when digital libraries become as popular as phisical discs (DVD's), then the business model of the DVD will cease to exist or at least diminish a lot, and that will change the whole mentality of the industry. Why would you buy a DVD when you can buy a digital copy that will always be yours and will always be accesible for you in many different platforms? Think of iTunes. Same for renting, why rent a phisical DVD when you can rent a digital version when you are at your sofa. You are thinking that the whole business model is set for life as it is, but in business that's not the correct mentality; and in technology business' that's actually the incorrect one!

[DanielGMask]

For now with digital streaming all bets are off. 

 

Not my bet.  My bet is that studios don't engage in a race to the bottom of TVOD pricing which will only do them economic harm

 

There will be no race to the bottom if the pie gets bigger or changes. What now happens with DVD's can happen with digital distribution, the only thing that has to change is the way for delivering the content: instead of DVD a digital stream (rent), instead of a DVD a digital library (buy). For that to happen the studios have to change the way they promote and distribute their content as well as the habits of consumers, but it may happen and it's certainly something that's not in the power of companies like Redbox to control.

[yadayada]

30% of US does not have fast cable internet. Plus there is a collector's thing. A lot of people enjoy having it in physical form. Just like how books are still popular in physical form. And if you sell physical you need to spend more on marketing. Because putting the dvd's out there on shelves is a form of marketing in itself.

 

And the studio's are limited in their DVD pricing by what is the optimal price. If they charge too much, theyr not selling a lot discs.

 

Even if they go digital at the same time and DVD sales go down steadily, tehre are the other release windows that need to be protected. So they will never offer cheap rental in that second release window. That kills of their other revenue streams for no gain (read my above post). 2$ per movie rental is basicly way too low if you hold a monopoly on your own content.

 

I think the mistake a lot of people make here is to assume that humans are a bunch of efficient super rational machines. If that was teh case, there should be almost no books right now. But there is some weird intangible benefit of owning a book in physical form, like showing off your book shelve. Even though you might only read it once. And even though you pay more money, and are less mobile with it.

 

And with owning physical copies of movies there is not even a clear downside vs digital copies, like you have with books.  For example downloading a bluray is about 10+ gb. That is huge for a lot of people with datalimits. You don't have that problem with digital books.

[mateo999]

Yeah, again, Daniel... misguided.

 

What do you mean when you say that studios have no say in DVD pricing?

 

First off, I actually don't mean to offend you.  I am no better/smarter than anyone on this forum so please don't mistake the word misguided for dumb.  As for the no say on DVD pricing, I mistyped in my haste.  I meant to say no say on DVD rental pricing.  To add to (or repeat) yadayada's points, dvds break and scratch and the parents of the child who loves Finding Nemo is definitely going to buy a second copy of it were the disc to stop functioning.  With a digital locker format, the studio just lost that second sale.  Also how many DVDs and Blu Rays are given as gifts?  How does a studio merchandise its movies when they're no longer at WMT?  In store end caps are cheaper than TV ad time or banner ad buys.  How many people like to bring a DVD/BR to a friend's house to watch? Suddenly that becomes "hey do you have an internet enabled TV with a decent internet connection?".  Lastly, BR, video and audio quality wise, trumps any highly compressed format you'll find streaming.  Then there's the whole broadband internet argument in general, seeing as a significant chunk of the US lacks broadband or has DSL.  This is all to say that in my opinion, physical disc movies will exist for some time.

 

Perhaps most importantly, and i think Yadayada was saying this, is that if Studios cut TVOD pricing, they don't just have to make up the price cut via volume, but they now have to make up the devaluing of their content downstream (HBO, streaming, and network TV) as letting Apple provide new release content for $2/stream will certainly affect the price HBO is will to pay for that content.

 

I'm not arguing that DVD is on the upswing, i'm arguing that the PV of OUTR's cash flows are above $53.

[shhughes1116]

All of this discussion on OUTR was well worth the registration fee to access this forum.

 

Anyways, Charlie Munger once said that to find great stocks you have to "look at the cannibals," companies that eat themselves over time by buying back their own shares.  If you think about OUTR in that manner, as a cannibal, then the calculus for owning this stock starts to change (at least it did for me). 

 

The new management has said repeatedly that they are committed to returning 75%-100% of free cash flow to shareholders, primarily in the form of stock buybacks.  If you assume that this will continue over the next ten years, the impact on free cash flow per share is pretty dramatic.  I suggest plugging these numbers into excel, with the assumption that Coinstar free cash flow will remain relatively constant over the next ten years (increase consistent with inflation), the assumption that DVD rentals will wither away and thus Redbox free cash flow will decline by 10%, every year, over the next ten years, and the assumption that ecoATM, SampleIT, and Coinstar Exchange are absolutely worthless.   

 

As long as management sticks to returning 75%-100% of FCF to shareholders, I think there is a pretty substantial margin of safety with this stock given the current share price.  If absolutely anything goes right (i.e. Redbox does not wither away, ecoATM results in substantial/recurring free cash flow, Coinstar continues to successfully expand via Coinstar and Coinstar Exchange), then there should be some reasonable upside.       

[yadayada]

There is some risk with Ecoatm being a bomb though. First of all, almost 300 million will be wasted. Second they might burn cash for a few years. Allthough looking at past failures, they do usually manage to at least sell for liek 30-40% of waht they spent.

[Picasso]

I am having a hard time getting my arms around the long thesis here.

 

You have a roughly $1 billion dollar stock doing $250 million of free cash flow.  Almost all that free cash flow is being used to repurchase shares.

 

Okay, great.

 

So let's say the business averages $200 million of FCF for 5 years.  You return all the invested capital back to shareholders in the form of buybacks and perhaps a dividend if the float shrinks enough.

 

But that is an average and you could see a very sudden drop in free cash flow at year 6,7,8.  What happens when free cash flow is looking to be $50 million in year 6? $25 million in year 7?  $0 in year 8?  We know the history of Blockbuster (even though their value proposition sucked, there have been many disruptions to this industry).

 

Around 75% of the return of capital will be in worthless shares by the time you hit year 8.  If they return $250 million in dividends over that time, after I pay tax I would be left with $200 million on a $1 billion dollar investment over eight years.  That is a negative 18% annual rate of return.

 

So it seems to me that the company buying back stock might not be the best deal for shareholders if you are dealing with a melting ice cube.  It would make sense that I want to pay 4x FCF because I am not really seeing the benefit of the returns.  A takeout is unlikely since the stock trades for about 8x FCF on an EV basis.  Any takeout would be at a pretty small premium.

 

I would bet you that if the company decided to cancel the buyback and instead do a dividend, the stock would soar.  Look at BPT as an example.  The value on the trust implies negative returns, but the dividend helps the stock retain value because people are speculating on how much cash the trust can pay before the jig is up.  What is the value of BPT if they reinvested back into BPT shares?  I would argue a lot less than the current market price.

 

It seems worth the extra tax hit to be able to bleed as much cash out of the business and run the stock down to zero over time.  If the business stablizes, great extra upside.  You could do pretty well (I would think).  I mean, you didn't see Buffett use the earnings of Blue Chip Stamps to perpetually retire shares of Blue Chip Stamps.  Because eventually you end up with 0 if it a self professed ice cube/cigar butt.

 

Am I missing something here?

[shhughes1116]

"So let's say the business averages $200 million of FCF for 5 years.  You return all the invested capital back to shareholders in the form of buybacks and perhaps a dividend if the float shrinks enough.

 

But that is an average and you could see a very sudden drop in free cash flow at year 6,7,8.  What happens when free cash flow is looking to be $50 million in year 6? $25 million in year 7?  $0 in year 8?  We know the history of Blockbuster (even though their value proposition sucked, there have been many disruptions to this industry)."

 

I don't think the Redbox - Blockbuster comparison is a valid comparison.  Blockbuster failed because there were fewer rentals/purchases to cover the high fixed costs (store leases) along with the high labor costs (multiple employees per store).  At the end of the day, Blockbuster could not compete with Redbox or other VOD services because they were not the lowest-cost provider.  Redbox does not have a high fixed cost problem, nor does it have a labor cost problem.   

 

There could be a sudden drop in cash flow any year.  Help me to understand why there might be a sudden drop in free cash flow in year 6, 7, or 8 as opposed to <insert any random number> year?  Even the most pessimistic scenarios that I have read for Redbox don't predict 45% y/y declines in free cash flow for 5 consecutive years, which is what your Year 5 number seems to imply for Redbox.  I have even more trouble imagining that the Coinstar business goes to 0 within 8 years.  This also assumes that ecoATM, Coinstar Exchange, and SampleIT are completely worthless.   

 

Around 75% of the return of capital will be in worthless shares by the time you hit year 8.  If they return $250 million in dividends over that time, after I pay tax I would be left with $200 million on a $1 billion dollar investment over eight years.  That is a negative 18% annual rate of return."

 

I'm not sure I follow your math, or underlying assumptions.

 

Don't forget that they expect to pay out $200-$240million in free cash flow while also spending ~$100 million per year on growth capex (~$40 million on CRM, ~$40 million on EcoATM, ~$15 million on Coinstar expansion, and ~$10 million on Redbox expansion in Canada).  At some point, the growth capex will slow down and this money will drop to the bottom line.     

[shhughes1116]

For what its worth, I do agree that a dividend, at some point, would cause a positive re-rating of the stock.  Paying out 50% of their free cash flow would yield a~$4.70/share annual dividend.  At a 5-7% dividend yield, that would be a $67-$94 share price. 

[treasurehunt]

Around 75% of the return of capital will be in worthless shares by the time you hit year 8.  If they return $250 million in dividends over that time, after I pay tax I would be left with $200 million on a $1 billion dollar investment over eight years.  That is a negative 18% annual rate of return.

This part of your analysis doesn't make sense to me. If you invest $1 billion right now, most of your shares would get bought back over the next seven years, and you would get cash for the shares you give up. According to your assumptions, the total amount of money you'll receive through buybacks will be 1.075 billion. Add the 200 million in dividends after tax, and the total is 1.275 billion, or a positive total return of 27.5%. 27.5% over 8 years is pretty bad, but it is a whole lot better than -18%.

 

A different way to do the analysis might be to look at this from the perspective of an investor who buys some shares now and holds till the end. Depending on the number of shares retired, the dividend per share should be a pretty high number in a few years. To calculate the exact return, in addition to your assumptions, we'll need to know how many shares are retired and when.

[siddharth18]

For what its worth, I do agree that a dividend, at some point, would cause a positive re-rating of the stock.  Paying out 50% of their free cash flow would yield a~$4.70/share annual dividend.  At a 5-7% dividend yield, that would be a $67-$94 share price. 

 

I agree as well. If they just came out and said "we realize that trying new ventures is a risky proposition and potentially throwing good money after bad, so here on out, we are stopping all growth capex and will simply return ALL of the FCF in the form of dividends"...that would re-rate the stock IMO. The FCF yield to equity, if you take out the growth capex, is much higher than 20%

[Picasso]

"So let's say the business averages $200 million of FCF for 5 years.  You return all the invested capital back to shareholders in the form of buybacks and perhaps a dividend if the float shrinks enough.

 

But that is an average and you could see a very sudden drop in free cash flow at year 6,7,8.  What happens when free cash flow is looking to be $50 million in year 6? $25 million in year 7?  $0 in year 8?  We know the history of Blockbuster (even though their value proposition sucked, there have been many disruptions to this industry)."

 

I don't think the Redbox - Blockbuster comparison is a valid comparison.  Blockbuster failed because there were fewer rentals/purchases to cover the high fixed costs (store leases) along with the high labor costs (multiple employees per store).  At the end of the day, Blockbuster could not compete with Redbox or other VOD services because they were not the lowest-cost provider.  Redbox does not have a high fixed cost problem, nor does it have a labor cost problem.   

 

There could be a sudden drop in cash flow any year.  Help me to understand why there might be a sudden drop in free cash flow in year 6, 7, or 8 as opposed to <insert any random number> year?  Even the most pessimistic scenarios that I have read for Redbox don't predict 45% y/y declines in free cash flow for 5 consecutive years, which is what your Year 5 number seems to imply for Redbox.  I have even more trouble imagining that the Coinstar business goes to 0 within 8 years.  This also assumes that ecoATM, Coinstar Exchange, and SampleIT are completely worthless.   

 

Around 75% of the return of capital will be in worthless shares by the time you hit year 8.  If they return $250 million in dividends over that time, after I pay tax I would be left with $200 million on a $1 billion dollar investment over eight years.  That is a negative 18% annual rate of return."

 

I'm not sure I follow your math, or underlying assumptions.

 

Don't forget that they expect to pay out $200-$240million in free cash flow while also spending ~$100 million per year on growth capex (~$40 million on CRM, ~$40 million on EcoATM, ~$15 million on Coinstar expansion, and ~$10 million on Redbox expansion in Canada).  At some point, the growth capex will slow down and this money will drop to the bottom line.   

 

I picked year five because I would just expect us to not be speculating about competitive threats in 5 years.  We will know what posed the largest threat to their business.  It could be 4 years or 8 years, it does not really impact my calculation by very much given the shareholder returns are still coming in the way of share repurchases. 

 

Keep in mind I am not implying 45% YOY drops for 5 consecutive years.  In fact the average FCF over 8 years in that scenario is $134 million per year.  That seems like a good outcome in my mind if there happens to be a nasty pivotal moment in the company.

 

So will something bad happen to cause this?  I don't know but I want to know what I am paying today if that does happen.  This is getting my arms around "the margin of safety at 4x FCF."

 

Also, this is not a non-levered cash generating machine.  The leverage is going to play an important factor in figuring out the margin of safety if the cash flow dwindles.  It is a lot different than a stock with a $1 billion EV doing $250 million of FCF.  The EV is pushing $2 billion.

 

If they are returning all that free cash flow over the next several years into share repurchases, in some year in the future, the present value of future cash flows from years 8+ will be much smaller than the current value of the business (if cash flow drops in my model).  All that cash flow would have been squandered on much higher share prices which can not be recouped aside from issuing new shares.  Sort of like Lampert buying up $6 billion of stock at an average price over $100 a share.  That cash is practically all gone unless he wants to put the shares back on the market for $1.5 billion.  Good luck with that.

 

I am coming to the conclusion the stock is cheap if the cash is going somewhere other than repurchasing shares.  The cash is more valuable into a dividend, acquisitions, etc. 

 

The stock seems cheap enough to buy you a couple years before we have a better understanding of the risks in the business.  But over those couple years I can find other stocks with 20% FCF yields with no debt and less probability of squandering the cash flow.

 

In terms of my math, I am not doing per share calculations because I am not trying to model what the repurchases will mean if they can still do $250 million of FCF (or $300 million or so when cap-ex drops) on a reduced share count.  That is the optionality but doesn't determine the margin of safety.  So I am just counting the cash going in to buy the shares versus the cash coming back out into you the shareholder.

 

I hope this makes sense but feel free to poke holes in my thought process.

[Picasso]

Around 75% of the return of capital will be in worthless shares by the time you hit year 8.  If they return $250 million in dividends over that time, after I pay tax I would be left with $200 million on a $1 billion dollar investment over eight years.  That is a negative 18% annual rate of return.

This part of your analysis doesn't make sense to me. If you invest $1 billion right now, most of your shares would get bought back over the next seven years, and you would get cash for the shares you give up. According to your assumptions, the total amount of money you'll receive through buybacks will be 1.075 billion. Add the 200 million in dividends after tax, and the total is 1.275 billion, or a positive total return of 27.5%. 27.5% over 8 years is pretty bad, but it is a whole lot better than -18%.

 

A different way to do the analysis might be to look at this from the perspective of an investor who buys some shares now and holds till the end. Depending on the number of shares retired, the dividend per share should be a pretty high number in a few years. To calculate the exact return, in addition to your assumptions, we'll need to know how many shares are retired and when.

 

But you don't get cash back on the repurchases.  Your stake in the company will only rise proportional to the repurchases.

 

If they repurchase $550 million of stock and you do not sell your shares in the process, you will just own twice as much a percentage of the overall business.  But the present value of your stock will still need to account for the future cash flow of the business after the repurchases have been made. 

 

So lets say they repurchase down to 1 million shares and the business is doing $25 million of FCF.  If I pick a multiple of 4x, it would imply a $100 million market cap and a $100 share price.  So the stock is a double over 5-8 years.

 

And then lets say they repurchase down to 1 million shares and the business is still doing $200 million of FCF.  At 4x, this is a $800 dollar stock.

 

But if the business implodes, there will be 1 million shares doing who knows what kinds of negative cash flows and the stock price will be near zero with over a billion dollars of debt around its neck.  All the repurchases would not have mattered.  A dividend would have been way more useful from a capital allocation standpoint.

 

As I tried to mention before, and maybe I was unclear, the stock is cheap if the cash flow can be deployed effectively.  Just because it is cheap does not mean the buybacks are the best answer because you can run into a situation where you effectively destroy all that value through a repurchase.  This situation is a lot different than someone thinking MMM or DE is cheap so repurchasing shares is great because you are efficiently reinvesting in cheap stock.  They have a much, much smaller probability of having prolonged periods of negative cash flows or leverage issues.

[siddharth18]

Picasso, for what it's worth, I kind of agree with you. I made a similar point earlier in the thread when we discovered Jana's hit and run - Dividends are better for shareholders going forward, not buybacks. I don't expect (or want) the management to try and "time" the purchases or worse, buyback every quarter regardless of price. I just want them to return the money back to shareholders in cash, directly and proportionally to each shareholder's ownership. I fear that a buyback at "high" price will enrich the sellers at the expense of remaining shareholders (of course what's "high" can be subjective...but I think you get my point).

 

I know I'll evoke the "buybacks are tax efficient compared to dividends..." but as I understand them, buybacks only defer tax, not avoid it...I feel safer receiving the dividend (even though it'll be taxed) rather than taking my chances on the outcome of buybacks (at whatever price they may happen).

[treasurehunt]

Around 75% of the return of capital will be in worthless shares by the time you hit year 8.  If they return $250 million in dividends over that time, after I pay tax I would be left with $200 million on a $1 billion dollar investment over eight years.  That is a negative 18% annual rate of return.

This part of your analysis doesn't make sense to me. If you invest $1 billion right now, most of your shares would get bought back over the next seven years, and you would get cash for the shares you give up. According to your assumptions, the total amount of money you'll receive through buybacks will be 1.075 billion. Add the 200 million in dividends after tax, and the total is 1.275 billion, or a positive total return of 27.5%. 27.5% over 8 years is pretty bad, but it is a whole lot better than -18%.

 

A different way to do the analysis might be to look at this from the perspective of an investor who buys some shares now and holds till the end. Depending on the number of shares retired, the dividend per share should be a pretty high number in a few years. To calculate the exact return, in addition to your assumptions, we'll need to know how many shares are retired and when.

 

But you don't get cash back on the repurchases.  Your stake in the company will only rise proportional to the repurchases.

 

I was analyzing the hypothetical situation you presented of someone who owns $1 billion in stock in OUTR today (in other words, all the stock in the company). In this situation, the owner of the stock would get money back on any stock repurchase. Who else is the company going to buy the stock back from? I was pointing out that if you start with this assumption, then it is incorrect to say that the only return is the $200 million of after-tax dividends. You need to add the money that you will get when the company buys some of your stock as part of the repurchase. Of course this is not a particularly realistic way of looking at the investment since nobody is going to own all the stock in the company, but I was just using your starting assumption.

 

I disagree with you and Siddharth when you guys claim that dividends are clearly better than buybacks for OUTR. Assuming that your estimate of the present value of the cash that OUTR will have available to return to shareholders -- through buybacks and dividends -- is significantly greater than the current stock price, buying back shares will increase the intrinsic value per share. Sounds like a good idea to me. Siddharth's complaint about the company buying back stock at too high a price seems misplaced; if he thinks the buyback price is too high, why is he holding the stock at that price? Anyway, I think Ericopoly has gone over this in great detail on other threads, and I don't really have anything to add to that.

[yadayada]

were having this discussion again??

 

Dividend is far inferior to buybacks in this situation. If you think buybacks are bad, you think that the stock is expensive and you should not own it. If you are a valueinvestor and you think you own cheap stocks, and you want a dividend, your basicly saying your stocks are expensive.

 

Also read the thread, and read the CSTR write ups on VIC they explain the business well. It iwll never go to zero. probably 100m$ is the lowest it can go. coinstar will place a 80m$ FCF bottom in this at year 5. Unless we stop using cash at year 5. That seems highly unlikely.

 

If they put a dividend sometime in the next 2 years if the stock is still low, stock would probably rerate to 90$ (9x multiple on 200m$). Sure you make a decent return.

 

They buy back another 350m$ at about 60$ a share, they will have about 14m shares outstanding. Stock rerates to a 9x multiple , you get 128$ per share. Even if you reinvest the dividend, you will not get that return with dividends. Your return would still be 108$.

 

They buy back 700m$ of shares at 70$? 10m shares outstanding. Let's say they generate 200m$ in year 3 and a 9x multiple = 180$ per share. Would have been 130-140$ a share with dividend.

 

Even all your dividends reinvested at 70$ you will get a lower return then with buybacks.

 

[DanielGMask]

I have nothing to add. I hope you are right with your thesis, but I think you are not. Good luck. ;-)

[Picasso]

Buybacks are a waste of capital for shareholders of certain companies. Would you argue HLF taking all their cash flow, suspending the dividend, and repurchasing shares that end up being worthless is better than a dividend? OUTR is no HLF but they face certain risks that make buybacks dangerous. If you're right and the company can maintain the cash flows you are going to get a 10 bagger on the stock. If you are wrong there is a decent chance you will get close to 0.

 

These repurchases need to be strategic in melting ice cube stocks otherwise you are enriching management at the expense of the shareholders. I need to look into how they are compensated or insider sales while the average repurchase cost of stock is at 52 week highs. 

 

Treasurehunt, the cash is going to other sellers of stock in the market.