Monday, July 28, 2014


I was kicking myself last year for not buying Outerwall (OUTR) after Mr. Market began a panic-sale. My order missed by a few cents, and the stock subsequently soared to new heights. But now that the price has come back down to earth, I'm getting a second chance. I have begun to nibble on the company's shares, hoping for a repeat of last year's rise.

Outerwall operates Redbox (automated kiosks with DVD rentals) and Coinstar (automated kiosks providing cash back for your coins...less a fee of course!) among other sophisticated machines that operate on the "outer wall" of high-traffic areas. Though the shares haven't quite fallen to the same level that they did last year when I just missed them, I believe the company is worth more now than it was then. The company has about 25% fewer shares now than it did last year (Outerwall is a frequent member of this cannibal list) while revenue and profit is also higher.

I'm also a fan of management. They are continually experimenting with new potential sources of growth, but don't waste too much capital trying to make concepts work that aren't working out; they recently shut down a few new concepts. At the same time, they have found one new concept in which they are confident: they are scaling up an automated kiosk concept that allows one to return one's old mobile phone for cash.

If this or some other innovation leads to profitable growth, great. If not, no big deal: the company trades a EV/OCF multiple of just 6. If there is a lot of capex for some reason, it's likely because a concept is profitable and is therefore being scaled out, so high future capex is not necessarily a bad thing.

One risk here though is the company's debt load. To finance all these buybacks, a sizable debt load was taken on. The company's cash flow has remained steady, which should allow for carrying this debt. But should the company falter, the leverage employed will hurt shareholders on the way down.


Unknown said...

Hey Saj what do you think of guardian capital. They are holding $400m of bmo shares. Ex this amount the multiple is pretty low. Would love your thoughts on this.

Saj Karsan said...

Hey Salim,

Thanks for the idea. It looks like a well-run business.

The problem with stripping out the securities at market value and looking at the multiple is that the earnings (the denominator of the multiple) include returns from the portfolio.

When I remove dividend/interest/capital gains from operating income, I get op income of about $4 million for the last quarter. At that run rate, the multiple isn't all that exciting, once you account for debt and client deposits.

Let me know if you disagree with something.

Anonymous said...


Today's earnings would have normally driven down the stock price based on outlook. Their core DVD rental business continues to fall but it is being offset by growth in other areas.

In your opinion is the bounce in OUTR today simply an issue of valuation and the fact that the price was too low to begin with?

Have they turned a corner or just temporarily delayed concerns about the viability of their business?

I suspect a majority of the price increase is short covering, at least for the time being.



Saj Karsan said...

Hi Frank,

You could be right that the price has risen because of valuation. I also think capital allocation is also playing a role (cash flow returned to shareholders in the form of fewer shares outstanding). Myself I liked the results because of the margin improvements. If they can keep reducing costs in the face of declining revenue, it will go a long way to keeping earnings steady / growing them.

Anonymous said...


Dividend and interest income for GCG in 3q 2014 was about $4.6m. So op income is about $5.5m not $4m...

What multiple do you consider exciting for the biz?

Also cash and debt offset each other. Not sure what client deposits you refer to..


Saj Karsan said...

Hi Anon,

Just looked at their annual. The value vs price is definitely improving, but here's how I look at it:

Of their $38M in op income, $18M is from dividends/interest, which is generated from assets that I'll count as reducing their enterprise value later, so I subtract that out to get $20M. Less taxes this is about $15M in earnings for the year.

The market value is $600M, less the $485 in securities ($525M less a 10% haircut on the drop in BMO shares) less $90 million cash plus deposits and bank loans of $110M = $135 million enterprise value.

This looks better now: $130 million EV / $15 million EBIT.

However, one huge risk for me is that BMO shares now account for $389 million of that EV! Do you have any idea why they do this? Seems like a liquid enough stock that they could diversify away from it.

Anonymous said...

Heres your chance Saj. Shares are down ~20% since your post.

Saj Karsan said...

Hi Anon,

Not sure if you're being sarcastic, but I actually was tempted to get back in this on the drop. However, debt is higher and declines continue to accelerate, so that kept me on the sidelines.