OUTERWALL INC OUTR
September 17, 2013 - 3:08pm EST by
bedrock346
2013 2014
Price: 49.44 EPS $4.92 $6.73
Shares Out. (in M): 28 P/E 10.0x 7.3x
Market Cap (in $M): 1,387 P/FCF 7.12x 6.8x
Net Debt (in $M): 225 EBIT 259 282
TEV ($): 1,613 TEV/EBIT 6.2x 5.7x

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  • Secular decline
  • High Short Interest
  • Sum Of The Parts (SOTP)

Description

Outerwall is the new incarnation of what was once Coinstar - a perennial VIC favorite that has been written up many times, but never in its current incarnation as Outerwall.  The company is like a Rorschach test for value investors. Many see an incredibly cheap cash flow machine in both its legacy coin and newer DVD business while others see a perennial value trap that is going to someday rapidly implode ala blockbuster as DVDs inevitably go away. I am not going to spend time rehashing those arguments which have been endlessly debated on this site.  Just as early shorts from the late 1990s were proven wrong that the cashless society would kill the coin business, I believe the shorts who think that DVDs will rapidly go away will also be disappointed  by the simple fact that at $1.20 a night, Redbox is substantially cheaper than VOD at $5 or so a night. Were that pricing to narrow, I would be far less constructive on the name. I apologize for the short and quick write-up, but wanted to post this idea in real time.
 
What I think is the far more interesting way to look at this business is where you are currently creating the company in total and stripping our various parts.  The company's take down of guidance last night creates an opportunity to buy the common at unbelievably cheap levels. So cheap in fact that I believe through some combination of investor fatigue at the company's inconstant guidance and stock performance and the company being a perennial activist and private equity target - investors should be able to reap a close to 35-100% return from these levels.
 
First let's look at the value backstop that coin and ecoATM provide.  The company just paid about $300mm for ecoATM, which is in the rapidly growing business of giving customers cash for their old phone and other electronic devices.  EcoATM is currently marginally profitable but the revenue per kiosk (currently north of $100k per kiosk) and large margin opportunity could create a business bigger than the $370mm of Redbox EBITDA, and unlike Redbox or coin eco could be a global busniess. Were that to occur over the next few years, it almost wouldn't matter what happens to Redbox. For now, I only assume that ecoATM is worth the $300mm that they just paid for the business. I look at coin which has been producing around $100mm of EBITDA for years could be sold to private equity for about 7x or $700mm. The coin business just announced a 11% price increase which at a constant EBITDA margin (conservative given that most should drop to the bottom line) would bring EBITDA to about $111mm. 7x that higher number would yield $777mm. I am not going to give the company any benefit for that but do think that $700mm is a fair value for coin given current EBITDA and CapX.  Together, the two businesses are worth about $1,000mm or $36 a share. Given that the free cash flow should pay down most of the debt in a year, you are creating the Redbox stub for about $387mm (debt free in a year) or $613mm right now. Using $370 of Redbox EBITDA that translates to 1.0x and 1.65x respectively which paying nothing for the coffee business or any of the other new ventures. Consolidated, you are creating the entire company at 3.4x EBITDA on the reduced guidance and closer to 3x next year's EBITDA. I believe the consolidated business is worth no less than 4x EBITDA, which is $67 dollars a share (assuming all the company's cash goes to debt pay down).
 
The company has done an excellent job of shrinking its float from the mid 30s to 28mm shares and added an extra $100mm to its existing buyback. If it were to double that amount to $200mm - essentially most of its yearly free cash flow and leave debt at current levels, the float would shrink to 24mm shares. At 4x EBITDA with $225 of net debt and 24mm shares the value grows to $69 per share. These number jibe with the values that Providence Equity was supposedly willing to pay a year ago. There are just not that many good cash flow businesses that can be had by private equity for only 4x EBITDA. BTW, the company is burning about $30mm of CapX on new ventures which could be shut and operating and capital expenses across all businesses have ballooned in recent years - leaving a lot of room for a PE firm (or an activist) to cut.
 
There is always the small but never achieved dream that OUTR could actually someday get a multiple ala GME which perennially traded at 3X EBITDA but now trades at 7x (maybe it's a squeeze but an investor can dream). OUTR is a much better collection of assets than GME, but let's take a discount and say 6x EBITDA of $470 (no growth or shrinkage) in one year's time with 28mm shares and no net debt. The value is $100 per share.  So if coin and eco are monetized and Redbox and everything else is a zero (unlikely, but let's put a full bear hat on) your downside is about $13.5 a share from here or 27%.  I believe the upside through a combination of an activist, private equity bid or just the company doing the right things (they did say that CapX was going to be cut and ventures is being rationalized and increased the buyback by $100mm) is between $67 and $100 per share or a 35-100% return. The current quote represents virtually rock bottom value. While the guidance was disappointing, it represents essentially flattish EBITDA on a bloated cost and Capx structure. Traffic to the kiosk is finally trending up and the margin hit should return when they get their promotions rationalized. This ascribes no value to ecoATM or coffee which is also unrealistic. Just selling ecoATM for $300mm would add $10.70 to that our range of values. None of this gives any optionality to the idea that higher margins could return which would yield EBITDA of about $530+next year.  4x that number would be $75 for a debt free company.
 
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

The Company has disappointed investors so many times and trades at such low multiples that this may be the time long term investors, who have typically resisted an LBO as not creating enough value, finally force more radical change on the management team (i.e. selling all or parts of the Company). Even if that doesn't occur, value should be its own catalyst from the current quote - especially if they beat very conservative guidance and or ecoATM ramps quickly.
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