COINSTAR INC CSTR
September 23, 2010 - 8:23am EST by
mojoris
2010 2011
Price: 39.52 EPS $2.00 $3.25
Shares Out. (in M): 33 P/E 19.8x 12.2x
Market Cap (in M): 1,293 P/FCF 13.0x 8.0x
Net Debt (in M): 321 EBIT 300 400
TEV: 1,614 TEV/EBIT 5.4x 4.0x

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Description

 

Coinstar (Ticker: CSTR / $39.52)

Event Type: Value Catalyst / Contrarian

Trade Recommendation:

  • Long CSTR equity, currently trading at 5.4x FY10 EV/EBITDA (price $39.52), ahead of the completion of Movie Gallery's liquidation and in conjunction with Blockbuster's Chapter 11 filing (filed 9/23/10).
  • Bedrock346 did a great job of presenting this opportunity when the stock was trading in the mid $20's in late 2009, but we would argue that despite the stock price being higher, the opportunity is more compelling now and offers a similar opportunity in terms of upside with more certainty and less downside risk.
  • Entry price offers $20-$40/share or 50%-100% of upside utilizing conservative market share and kiosk life assumptions over the next 3-6 months.
  • Four significant catalysts over the next 2 months provide a clear event path on a left-for-dead growth equity that generates $100+m in free cash flow (and growing) with minimal capex/fixed cost requirements post 2011. Catalysts, discussed in more detail, are as follows:
  1. Blockbuster Chapter 11: filed September 23
  2. Movie Gallery Chapter 7 liquidation: October 29

  3. Online strategy announcement: mid/late October

  4. Strong earnings: late October/early November; share repurchase and/or debt paydown

Situation Overview:

Coinstar has two distinct businesses - a coin collecting/cashing business (~ $100m 2010 EBITDA, $60.7m YTD) and Redbox, the dvd kiosk business ( ~ $200m EBITDA 2010, $130m EBITDA YTD).  You either love Coinstar or you hate it. Clearly, with 7.8mm shares sold short, there are a lot of haters (per Bloomberg, but chart doesn't show up on VIC). 

And for good reason, Redbox, will not exist at some point in the future. If you are short, and can wait it out as the ice cube melts and pay the cost to borrow for the next # of years (only 75bps as of September 15th according to various primer brokers), there is probably $15-25 to make depending on your future borrow cost assumptions. Using a straight-forward death-spiral Redbox valuation (assuming 100% y-o-y kiosk declines + 10% y-o-y reduction in revenue/kiosk), this $15-25/share assumes that the Redbox kiosk business disintegrates to $0 in the next 6 years.  To put this sensitivity in context:

  • Various industry estimates call for ~ 2% p.a. growth in the physical DVD market over the next 5 years.
  • The two largest dvd chains are closing thousands of stores, a large portion of this share transfers to Redbox.
  •         Movie Gallery is in the process of shuttering its 3,400+ stores.
  •         Blockbuster, which filed for Chapter 11 on 9/23/10, is expected to close 800-1,000 stores (and potentially more).
  • Over the last 2.5 years, CSTR has grown its kiosk footprint by 264% while maintaining stable revenue per kiosk (+0.6% per kiosk) (compare vs. NFLX at 78% sub growth over the last 2.5 years with a -10.6% decline in revenue per sub over the last six quarters).

Based on the multiple positive catalysts ahead, the IRR on a short doesn't seem compelling at this level. In fact, after further due diligence, CSTR once again, seems like a tremendous long opportunity with limited downside.  Please see prior CSTR write-up from Bedrock346 on November 20, 2009, which provided over 100% return at a time of tremendous uncertainty.

Some Background:

  • Redbox versus Hollywood: Redbox has settled their litigious battles with the movie studios (no more workaround), and has removed the major overhang on the stock price.
  • The new management team, under Paul Davis, has successfully undone the bad habits of the prior team and is appropriately reinvesting in Coinstar and Redbox.
  • Redbox's first mover advantage over NCR continues to improve via new kiosk partnerships such as Ez-Mart and CVS (as an aside: many NCR shareholders would like to see them throw in the towel in the entertainment space)
  • Coinstar has shed its non-core, non-contributing (via growth or margin) E-Payment and Money Transfer business.

Overview of Potential Catalysts:

  • Movie Gallery Liquidation - October 29
  • Blockbuster Chapter 11 and inevitably will follow same downsizing path as Movie Gallery - filed on September 23 with agreement from its senior secured bondholders
  • New Redbox Kiosk roll-outs (recently announced Worsley Companies and CVS)
  • Short Covering (24% of float is short, up ~ 1. 2m month-over-month).
  • New Online Partnership announcements: speculation regarding improving relationship with Apple
  • Accelerated Share Repurchase: CSTR has the ability to buyback ~2mm shares (~ 7% shares outstanding) via free cash flow alone and/or repurchase debt (the Company is levered 1.1x FY10 EBITDA).
  • Expansion of blu-ray discs (at all locations this fall at a higher price point, not included in our estimates = $0.50 or 50% increase in revenue per rental - much of which will flow to EPS).

Value of Coin Business:

The coin business will do $85 -$100m in EBITDA each year without much investment.  In addition, only ~ $5m of maintenance capex is required to run the business.  It's worth mentioning that this "dying" business has generated in excess of $25m in EBITDA per quarter for the last eighteen quarters.

Coin Business

 

 

 

 

New Entrants

Status Quo

Improvement/Divestiture

EBITDA

85.00

100.00

110.00

Multiple

6.50x

8.00x

9.00x

EV

552.50

800.00

990.00

Debt

(321.00)

(321.00)

(321.00)

Equity

231.50

479.00

669.00

Shares

32.72

32.72

32.72

Price

7.08

14.64

20.45

% of Current Equity

17%

36%

50%

 

Value of Redbox:

Assumptions: $250 - $300m of EBITDA in 2011 (excluding Blockbuster Chapter 11 store closures, Movie Gallery liquidation and incremental uplift on blueray penetration). Note: all of the debt resides with the coin business.

$250m Redbox EBITDA - conservative case

  • Using a 3x EBITDA multiple = $750m / 32.7m shares = $22.94/share
  • Using a 5x EBITDA multiple = $1.25b value / 32.7m shares = $38.23/share

$300m Redbox EBITDA - likely case

  • Using a 3x EBITDA multiple = $900m/32.7m shares = $27.52/share
  • Using a 5x multiple = $1.5b / 32.7m shares = $45.87/share

Using a 50% discount to NFLX multiple (50% of 15.9x); $300m of EBITDA = $73/share.

Sum of the Parts:

Range of Values: $31 - $93 per share.

We believe (with the understanding that Redbox is a "melting ice cube" sometime in the next 4-12 years) that today's fair value is $60 - $70 per share. Can the stock price get to $93 or our high end?  The answer is yes, as most controversial situations overshoot to the downside and to the upside.

Catalysts to realize $60 - $70 per share:

Move Gallery Chapter 7 Liquidation:

On October 29, 2010, Movie Gallery will finally be put out of its misery.

Quick background: Movie Gallery filed for bankruptcy protection on Feb. 2 for the second time since 2007, saying it planned to close "a significant number" of stores. In May 2010, they decided to file for Chapter 7 liquidation. Before the first bankruptcy Movie Gallery had 3,500 stores. This time they are shutting down 2,415 stores. The confirmation hearing for approval of the plan is set for Oct. 28. We believe a similar scenario holds true for Blockbuster despite the involvement of Carl Icahn. Blockbuster discussion to follow... Below is a simple Movie Gallery market share analysis and the opportunity for Redbox:

Current Margin Case:

 

 

Movie Gallery/HW Video Market Share percentage

7.7%

Near-term market share opportunity

580

Redbox portion 45%

 

 

261

Adj portion for lower rent amt

 

175

Assumed margin

 

 

17.5%

Redbox incremental EBITDA

 

31

Per share value at 6.5x multiple

 

$6.58

 

Normalized Margin Case:

 

 

Movie Gallery/HW Video Market Share percentage

7.7%

Near-term market share opportunity

580

Redbox portion 45%

 

 

261

Adj portion for lower rent amt

 

175

Assumed margin

 

 

19.0%

Redbox incremental EBITDA

 

33

Per share value at 6.5x multiple

 

$7.14

 

In summary, the Movie Gallery liquidation should create value of $7 per share.

Blockbuster Chapter 11 Reorganization:

On September 23, 2010, Blockbuster filed for Chapter 11 after reaching an agreement with 80.1% of its senior secured bond holders.  Under the plan, the bondholders will convert their holdings into equity; subordinated holders and existing equity holders will receive no proceeds.  The plan calls for a $125m in DIP facilities which will be the only debt in the structure post implementation.  We assume that Redbox captures 45% of the Blockbuster market share based on an initial 800-1,000 store closures (again, the WSJ has reported there could be more closures).

Current Margin Case:

 

 

Blockbuster Share Grab

 

4.5%

Near-term market share opportunity

340

Redbox portion

 

 

153

Assumed margin

 

 

17.5%

Redbox incremental EBITDA

 

18

Per share value at 6.5x multiple

 

$3.85

 

Normalized Margin Case:

 

 

Blockbuster Share Grab

 

4.5%

Near-term market share opportunity

340

 

Redbox portion

 

 

153

 

Assumed margin

 

 

19.0%

 

Redbox incremental EBITDA

 

19

 

Per share value at 6.5x multiple

 

$4.18

 

             

 

In summary, the Blockbuster Chapter 11 should conservatively create at least $4 of value per share. In total, the Movie Gallery and Blockbuster catalysts should create at least $11 of value ex any margin expansion. I don't think it's necessary to discuss the various levers for margin expansion (pricing, blue ray, online partnerships, etc) as that is all upside option value.

Total Market Share Grab Sensitivity:

Conservatively, Redbox will hold a sustainable >20% market share, and at least 17.5% EBITDA margins (more likely 19%), leading to EBITDA of $268 - $364mm within the next 12-18 months.  In total, with the coin business, there is ~ 68% upside assuming de-minimus operating leverage.  Note: Piper Jaffray estimates that Redbox will have 27.5% market share in 2012.

 

 

2011 Market Share

 

 

 

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

 

 

17.50%

268

282

295

309

322

336

 

 

17.75%

272

286

299

313

327

340

 

 

18.00%

276

290

304

318

331

345

 

 

18.25%

280

294

308

322

336

350

 

 

18.50%

284

298

312

326

341

355

 

EBITDA

18.75%

288

302

316

331

345

360

 

Margin

19.00%

291

306

321

335

350

364

 

 

19.25%

295

310

325

340

354

369

 

 

19.50%

299

314

329

344

359

374

 

 

19.75%

303

318

333

348

364

379

 

 

20.00%

307

322

337

353

368

383

 

 

 

2011 Market Share

 

 

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

 

17.50%

$66.42

$69.16

$71.91

$74.66

$77.40

$80.15

 

17.75%

$67.20

$69.99

$72.77

$75.56

$78.34

$81.13

 

18.00%

$67.99

$70.81

$73.64

$76.46

$79.29

$82.11

 

18.25%

$68.77

$71.64

$74.50

$77.36

$80.23

$83.09

 

18.50%

$69.56

$72.46

$75.36

$78.27

$81.17

$84.07

EBITDA

18.75%

$70.34

$73.28

$76.23

$79.17

$82.11

$85.05

Margin

19.00%

$71.13

$74.11

$77.09

$80.07

$83.05

$86.03

 

19.25%

$71.91

$74.93

$77.95

$80.97

$83.99

$87.01

 

19.50%

$72.69

$75.76

$78.82

$81.88

$84.94

$88.00

 

19.75%

$73.48

$76.58

$79.68

$82.78

$85.88

$88.98

 

20.00%

$74.26

$77.40

$80.54

$83.68

$86.82

$89.96

                               

 

Why Redbox Isn't Movie Gallery / Blockbuster:

First, let's take a look at the evolution of the physical DVD market and its competitors.  Mom and pop rental chains and supermarkets ceded control of the market to big box players Blockbuster, Movie Gallery and Hollywood Video who garnered significant studio and marketing clout. Blockbuster and Movie Gallery then pursued the smallest of the big three, Hollywood Video, in which Movie Gallery eventually paid over $1.3bn (and levered its balance sheet to pay for it).  Blockbuster acquired the divested stores from the Movie Gallery-Hollywood Video transaction and in turn leveraged its balance sheet.  Enter Redbox and NFLX.  The hunters, now saddled with heavy debt loads, became the hunted.  Redbox and NFLX, not hindered by debt and costly lease arrangements, were quickly able to undercut the big box players.  A simple table illustrates the slow demise of Blockbuster and Movie Gallery.

 

Coinstar

Blockbuster

Movie Gallery

 

2008

2009

2010

2008

2009

2010

2007

2008

Kiosks/ Stores

13,700

22,400

30,400

7,405

6,520

5,708

3,889

3,472

Sales

650

1,033

1,500

5,065

4,062

3,407

2,452

2,223

EBITDA

150

197

300

277

158

(8)

300

24

Net Debt

285

408

321

959

775

856

883.4

1,119

Leverage

1.90x

2.07x

1.07x

3.46x

4.91x

NM

2.74

46.62x

                   

 

We aren't debating a similar fate for Redbox - eventually, the physical DVD market will give way to streaming/digital/VOD distribution.  However, industry estimates still call for ~ 2% p.a. growth in physical DVD markets for the next 5 years, and those estimates don't need to be achieved for this thesis to work.  A growing market only expands the Redbox opportunity beyond the natural gain share as Blockbuster pares its store portfolio and as Redbox expands its own kiosk distribution network.

Summary:

In total, applying conservative assumptions to the near term redbox opportunity yields 50-100% upside, with downside protection afforded via highly stable and entrenched coin-business.  Excluding the potential upcoming soft catalysts (share repurchase announcements, debt pay-down, online strategy roll-out), the demise of Blockbuster and Movie Gallery yield at a minimum $11/share of upside. Even under the current depressed CSTR multiple the market has given us another asymmetric investment opportunity in Coinstar for value investors.  While this is not NFLX (it's not trying to be), it certainly isn't Blockbuster and Movie Gallery either.   

 

Catalyst

  • Blockbuster Chapter 11: filed September 23
  • Movie Gallery Chapter 7 liquidation: October 29
  • Online strategy announcement: mid/late October
  • Strong earnings: late October/early November; share repurchase and/or debt paydown
    sort by   Expand   New

    Description

     

    Coinstar (Ticker: CSTR / $39.52)

    Event Type: Value Catalyst / Contrarian

    Trade Recommendation:

    1. Blockbuster Chapter 11: filed September 23
    2. Movie Gallery Chapter 7 liquidation: October 29

    3. Online strategy announcement: mid/late October

    4. Strong earnings: late October/early November; share repurchase and/or debt paydown

    Situation Overview:

    Coinstar has two distinct businesses - a coin collecting/cashing business (~ $100m 2010 EBITDA, $60.7m YTD) and Redbox, the dvd kiosk business ( ~ $200m EBITDA 2010, $130m EBITDA YTD).  You either love Coinstar or you hate it. Clearly, with 7.8mm shares sold short, there are a lot of haters (per Bloomberg, but chart doesn't show up on VIC). 

    And for good reason, Redbox, will not exist at some point in the future. If you are short, and can wait it out as the ice cube melts and pay the cost to borrow for the next # of years (only 75bps as of September 15th according to various primer brokers), there is probably $15-25 to make depending on your future borrow cost assumptions. Using a straight-forward death-spiral Redbox valuation (assuming 100% y-o-y kiosk declines + 10% y-o-y reduction in revenue/kiosk), this $15-25/share assumes that the Redbox kiosk business disintegrates to $0 in the next 6 years.  To put this sensitivity in context:

    Based on the multiple positive catalysts ahead, the IRR on a short doesn't seem compelling at this level. In fact, after further due diligence, CSTR once again, seems like a tremendous long opportunity with limited downside.  Please see prior CSTR write-up from Bedrock346 on November 20, 2009, which provided over 100% return at a time of tremendous uncertainty.

    Some Background:

    Overview of Potential Catalysts:

    Value of Coin Business:

    The coin business will do $85 -$100m in EBITDA each year without much investment.  In addition, only ~ $5m of maintenance capex is required to run the business.  It's worth mentioning that this "dying" business has generated in excess of $25m in EBITDA per quarter for the last eighteen quarters.

    Coin Business

     

     

     

     

    New Entrants

    Status Quo

    Improvement/Divestiture

    EBITDA

    85.00

    100.00

    110.00

    Multiple

    6.50x

    8.00x

    9.00x

    EV

    552.50

    800.00

    990.00

    Debt

    (321.00)

    (321.00)

    (321.00)

    Equity

    231.50

    479.00

    669.00

    Shares

    32.72

    32.72

    32.72

    Price

    7.08

    14.64

    20.45

    % of Current Equity

    17%

    36%

    50%

     

    Value of Redbox:

    Assumptions: $250 - $300m of EBITDA in 2011 (excluding Blockbuster Chapter 11 store closures, Movie Gallery liquidation and incremental uplift on blueray penetration). Note: all of the debt resides with the coin business.

    $250m Redbox EBITDA - conservative case

    $300m Redbox EBITDA - likely case

    Using a 50% discount to NFLX multiple (50% of 15.9x); $300m of EBITDA = $73/share.

    Sum of the Parts:

    Range of Values: $31 - $93 per share.

    We believe (with the understanding that Redbox is a "melting ice cube" sometime in the next 4-12 years) that today's fair value is $60 - $70 per share. Can the stock price get to $93 or our high end?  The answer is yes, as most controversial situations overshoot to the downside and to the upside.

    Catalysts to realize $60 - $70 per share:

    Move Gallery Chapter 7 Liquidation:

    On October 29, 2010, Movie Gallery will finally be put out of its misery.

    Quick background: Movie Gallery filed for bankruptcy protection on Feb. 2 for the second time since 2007, saying it planned to close "a significant number" of stores. In May 2010, they decided to file for Chapter 7 liquidation. Before the first bankruptcy Movie Gallery had 3,500 stores. This time they are shutting down 2,415 stores. The confirmation hearing for approval of the plan is set for Oct. 28. We believe a similar scenario holds true for Blockbuster despite the involvement of Carl Icahn. Blockbuster discussion to follow... Below is a simple Movie Gallery market share analysis and the opportunity for Redbox:

    Current Margin Case:

     

     

    Movie Gallery/HW Video Market Share percentage

    7.7%

    Near-term market share opportunity

    580

    Redbox portion 45%

     

     

    261

    Adj portion for lower rent amt

     

    175

    Assumed margin

     

     

    17.5%

    Redbox incremental EBITDA

     

    31

    Per share value at 6.5x multiple

     

    $6.58

     

    Normalized Margin Case:

     

     

    Movie Gallery/HW Video Market Share percentage

    7.7%

    Near-term market share opportunity

    580

    Redbox portion 45%

     

     

    261

    Adj portion for lower rent amt

     

    175

    Assumed margin

     

     

    19.0%

    Redbox incremental EBITDA

     

    33

    Per share value at 6.5x multiple

     

    $7.14

     

    In summary, the Movie Gallery liquidation should create value of $7 per share.

    Blockbuster Chapter 11 Reorganization:

    On September 23, 2010, Blockbuster filed for Chapter 11 after reaching an agreement with 80.1% of its senior secured bond holders.  Under the plan, the bondholders will convert their holdings into equity; subordinated holders and existing equity holders will receive no proceeds.  The plan calls for a $125m in DIP facilities which will be the only debt in the structure post implementation.  We assume that Redbox captures 45% of the Blockbuster market share based on an initial 800-1,000 store closures (again, the WSJ has reported there could be more closures).

    Current Margin Case:

     

     

    Blockbuster Share Grab

     

    4.5%

    Near-term market share opportunity

    340

    Redbox portion

     

     

    153

    Assumed margin

     

     

    17.5%

    Redbox incremental EBITDA

     

    18

    Per share value at 6.5x multiple

     

    $3.85

     

    Normalized Margin Case:

     

     

    Blockbuster Share Grab

     

    4.5%

    Near-term market share opportunity

    340

     

    Redbox portion

     

     

    153

     

    Assumed margin

     

     

    19.0%

     

    Redbox incremental EBITDA

     

    19

     

    Per share value at 6.5x multiple

     

    $4.18

     

                 

     

    In summary, the Blockbuster Chapter 11 should conservatively create at least $4 of value per share. In total, the Movie Gallery and Blockbuster catalysts should create at least $11 of value ex any margin expansion. I don't think it's necessary to discuss the various levers for margin expansion (pricing, blue ray, online partnerships, etc) as that is all upside option value.

    Total Market Share Grab Sensitivity:

    Conservatively, Redbox will hold a sustainable >20% market share, and at least 17.5% EBITDA margins (more likely 19%), leading to EBITDA of $268 - $364mm within the next 12-18 months.  In total, with the coin business, there is ~ 68% upside assuming de-minimus operating leverage.  Note: Piper Jaffray estimates that Redbox will have 27.5% market share in 2012.

     

     

    2011 Market Share

     

     

     

    20.0%

    21.0%

    22.0%

    23.0%

    24.0%

    25.0%

     

     

    17.50%

    268

    282

    295

    309

    322

    336

     

     

    17.75%

    272

    286

    299

    313

    327

    340

     

     

    18.00%

    276

    290

    304

    318

    331

    345

     

     

    18.25%

    280

    294

    308

    322

    336

    350

     

     

    18.50%

    284

    298

    312

    326

    341

    355

     

    EBITDA

    18.75%

    288

    302

    316

    331

    345

    360

     

    Margin

    19.00%

    291

    306

    321

    335

    350

    364

     

     

    19.25%

    295

    310

    325

    340

    354

    369

     

     

    19.50%

    299

    314

    329

    344

    359

    374

     

     

    19.75%

    303

    318

    333

    348

    364

    379

     

     

    20.00%

    307

    322

    337

    353

    368

    383

     

     

     

    2011 Market Share

     

     

    20.0%

    21.0%

    22.0%

    23.0%

    24.0%

    25.0%

     

    17.50%

    $66.42

    $69.16

    $71.91

    $74.66

    $77.40

    $80.15

     

    17.75%

    $67.20

    $69.99

    $72.77

    $75.56

    $78.34

    $81.13

     

    18.00%

    $67.99

    $70.81

    $73.64

    $76.46

    $79.29

    $82.11

     

    18.25%

    $68.77

    $71.64

    $74.50

    $77.36

    $80.23

    $83.09

     

    18.50%

    $69.56

    $72.46

    $75.36

    $78.27

    $81.17

    $84.07

    EBITDA

    18.75%

    $70.34

    $73.28

    $76.23

    $79.17

    $82.11

    $85.05

    Margin

    19.00%

    $71.13

    $74.11

    $77.09

    $80.07

    $83.05

    $86.03

     

    19.25%

    $71.91

    $74.93

    $77.95

    $80.97

    $83.99

    $87.01

     

    19.50%

    $72.69

    $75.76

    $78.82

    $81.88

    $84.94

    $88.00

     

    19.75%

    $73.48

    $76.58

    $79.68

    $82.78

    $85.88

    $88.98

     

    20.00%

    $74.26

    $77.40

    $80.54

    $83.68

    $86.82

    $89.96

                                   

     

    Why Redbox Isn't Movie Gallery / Blockbuster:

    First, let's take a look at the evolution of the physical DVD market and its competitors.  Mom and pop rental chains and supermarkets ceded control of the market to big box players Blockbuster, Movie Gallery and Hollywood Video who garnered significant studio and marketing clout. Blockbuster and Movie Gallery then pursued the smallest of the big three, Hollywood Video, in which Movie Gallery eventually paid over $1.3bn (and levered its balance sheet to pay for it).  Blockbuster acquired the divested stores from the Movie Gallery-Hollywood Video transaction and in turn leveraged its balance sheet.  Enter Redbox and NFLX.  The hunters, now saddled with heavy debt loads, became the hunted.  Redbox and NFLX, not hindered by debt and costly lease arrangements, were quickly able to undercut the big box players.  A simple table illustrates the slow demise of Blockbuster and Movie Gallery.

     

    Coinstar

    Blockbuster

    Movie Gallery

     

    2008

    2009

    2010

    2008

    2009

    2010

    2007

    2008

    Kiosks/ Stores

    13,700

    22,400

    30,400

    7,405

    6,520

    5,708

    3,889

    3,472

    Sales

    650

    1,033

    1,500

    5,065

    4,062

    3,407

    2,452

    2,223

    EBITDA

    150

    197

    300

    277

    158

    (8)

    300

    24

    Net Debt

    285

    408

    321

    959

    775

    856

    883.4

    1,119

    Leverage

    1.90x

    2.07x

    1.07x

    3.46x

    4.91x

    NM

    2.74

    46.62x

                       

     

    We aren't debating a similar fate for Redbox - eventually, the physical DVD market will give way to streaming/digital/VOD distribution.  However, industry estimates still call for ~ 2% p.a. growth in physical DVD markets for the next 5 years, and those estimates don't need to be achieved for this thesis to work.  A growing market only expands the Redbox opportunity beyond the natural gain share as Blockbuster pares its store portfolio and as Redbox expands its own kiosk distribution network.

    Summary:

    In total, applying conservative assumptions to the near term redbox opportunity yields 50-100% upside, with downside protection afforded via highly stable and entrenched coin-business.  Excluding the potential upcoming soft catalysts (share repurchase announcements, debt pay-down, online strategy roll-out), the demise of Blockbuster and Movie Gallery yield at a minimum $11/share of upside. Even under the current depressed CSTR multiple the market has given us another asymmetric investment opportunity in Coinstar for value investors.  While this is not NFLX (it's not trying to be), it certainly isn't Blockbuster and Movie Gallery either.   

     

    Catalyst

    Messages


    SubjectRE: RE: RE: RE: RE: redbox economics
    Entry09/29/2010 04:53 PM
    MemberJackBlack
    I have followed CSTR/Redbox closely for a few years now and wanted to contribute my two cents to this discussion.  In terms of unit-level economics, they are very good but not as good as what has been discussed in this thread.  Management has only stated that the cost is roughly $15k/kiosk, the revenue ramp of the kiosks over the first three years is 30k-40k-50k, and that cash payback takes 2-3 years.  The segment margins disclosed by Coinstar (~16-17% for Redbox) are EBITDA margins and fully-allocated (include not only field service costs but corporate overhead).  Using that information, I back into an EBITDA margin progression of 10%-25%-27% over the first three years.  I think those margin assumptions foot with the reported segment margins when you include allocation of corporate expenses and the fact that some kiosks are immature.  Beyond the first three years, I assume comps come down quite materially (7% in year 4 and 3% thereafter) primarily because there are very real capacity constraints on the kiosks (e.g., only 630 DVD slots / kiosk plus they have to have some empty slots for returns; also lines are a big bottleneck).  In terms of maintenance capex, it is really minimal currently because the kiosks are all so new (most minor maintenance capex is expensed through the P&L) and I assume that, similar to the coin machines, the kiosks will have a life well in excess of 10 years.  I will consider it a very good problem if the business of DVD kiosks is around long enough for Redbox to have to worry about the cost of replacing their entire installed base.  So, based on those assumptions as well as assuming $9k/box of inventory investment (less now b/c of the 28-day window deals), and using a 4x EBITDA multiple on the terminal year (Year 6) and a 12% discount rate, I get to an NPV of about $45k/kiosk.  Since they have already spend the $15k capex plus $9k inventory for each of the 27,000 machines they have installed, that leaves a value / existing kiosk of roughly $70k, or about $1.9Bn (this obviously isn't exact since some kiosks are further along in their lifecycle) but that works out to ~9x the current level of Redbox EBITDA.  Plus you can give them credit for ~$45k NPV for future kiosks that they install (this NPV/kiosk will decline over time as we get closer to the "end of life" for the business, whenever that is) and maybe there is some option value if they come up with a digital strategy that makes sense.  Assuming a value of about $600mm for the Coin business, cash proceeds from the money transfer sale, ascribe some value for the NOLs, less the net debt and I think you get to a $70/share value pretty easily.  Then there's more option value if the life of the DVD is longer than I am modeling and/or if they have any success with some of the new kiosk concepts that they are working on.   

    Subjectshare grab from brick and mortar
    Entry09/30/2010 12:18 AM
    Memberjacob828
    Any thoughts re the amount of revenue these guys typically pick up from liquidating video stores?  Is the 45% assumption that you used based on specific guidance from mgmt based on its experience at kiosks near a store that liquidates / closes?  I've been struggling to be more scientific on this issue as it seems like a meaningful tailwind that will exist for a few years as Blockbuster closes a ton of stores (they disclosed in investor presentations that around 80% of the EBITDA is from around 30% of the stores and that is before they were comp'ed down very hard in 2q and guided to a high single digit negative comp for 2h 2010).  Another problem is that this dynamic was obscured somwhat in 2q (and maybe 3q too) as closing Movie Gallery stores just generate a lot of discs for sale at bargain basement prices that Redbox potentially had to compete with for a brief period when these stores iquidate.
    Per the WSJ article on video rental stores that just came out, there is also a huge number of mom and pop video stores (materially more than Blockbuster) that face the same issues and will continue to close due to Redbox and Netflix and will provide a stream of additional revenue / market share gain for the next few years.

    SubjectYOWZA
    Entry10/29/2010 10:01 AM
    Membercross310
    Numbers and guidance were stellar. What do you make of the streaming strategy?
     

    Coinstar's Redbox Plans 2011 Launch For Web-Based Streaming

    Posted by Eric Savitz

    Coinstar (CSTR), parent of the Redbox video rental kiosk business, is making plans to take on Netflix (NFLX) in Web-based movie distribution, the Los Angeles Times reports. The piece noted that the company plans to offer a monthly subscription plan similar to the one Netflix offers, although Coinstar so far has not discussed its pricing strategy.

    Meanwhile, on the company's post-earnings conference call yesterday afternoon, CEO Paul Davis said that the company is confident that "physical DVDs and Redbox kiosks will remain relevant for a very long time to come." But he added that consumers have told the company they want a broader selection than the kiosks provide. "So, while we are confident in the future of DVDs, we believe an expanded offering via digital could be a natural evolution to augment our core business," he said.

    Davis said the company has concluded that the best approach will be to part with another company or companies in the digital market.

    "This would enable us to leverage our combined strengths and maximize ROI without Redbox having to invest significant capital to either fully build the technology ourselves or acquire content from a third party," he said. "Over the past few months, we have conducted a deliberate and rigorous review of potential partners to ensure we enter the space with a winning solution for our consumers and shareholders. As a result of this work, we are currently in detailed discussions with a number of highly interested parties. It is clear from these conversations that potential partners both appreciate and value our key advantages that make us an attractive and unique partner."

    He added that the company plans to launch a Redbox-branded digital strategy in the market in 2011.

    The company did not discuss specific potential partners.

    Spurred by strong Q3 results, CSTR this morning is up $9.86, or 21.3%, to $56.12.


    SubjectPremium VOD
    Entry12/10/2010 11:46 AM
    Membercross310
    Any view on how a potential premium VOD offering would affect Redbox?

    SubjectRE: RE: Pre-announce Q4
    Entry02/08/2011 01:55 PM
    Membercam121
    Any comments after the call last week?
     
    Your table only goes up to 25% market share and you said Piper estimated 27.5% market share in 2012.  But on the call they said they were 29% market share in Q4.  Are you calculating it the same way management is?
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