OUTFRONT Media Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

OUTFRONT Media Inc. is a real estate investment trust (REIT) focused on out-of-home advertising solutions, primarily consisting of billboards and transit displays in the United States and Canada.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

OUTFRONT Media’s moat can be rated at a 3/5, as it leverages geographic density and local relationships, which creates a barrier to entry for competitors. This competitive advantage, however, is not as robust as that of companies with greater differentiation or network effects.

Let’s look at why: Business Overview OUTFRONT Media operates in the out-of-home (OOH) advertising sector, specializing in billboards, transit advertising, and related digital displays.

  • Revenue Distribution:
    • Billboard segment: Primarily derives revenue from leasing advertising space on its large format static and digital billboards, often located along highways, on urban thoroughfares, and in other areas with significant traffic. This segment is the major revenue driver for OUT.
    • Transit segment: Revenue comes from advertising displays in transit systems, such as buses, subway stations, and rail.
    • Geographical Split: As of March 31, 2024, the revenue for the three-month period was split as follows: U.S. Media: 89.5%, Canada: 9.5% and other (international) 1%.

Most of the revenues are in the U.S. and Canada. The revenue mix has remained stable for several years, which suggest consistency.

  • Industry Trends:
    • Digital Transformation: The OOH advertising industry is seeing an increase in the adoption of digital technology, with static billboards being replaced with digital displays. This transition offers new opportunities, especially in increased revenue from dynamic ad content, but also requires significant capital expenditure and technological knowledge.
    • Data and Analytics: Data collection and analysis are becoming more important to demonstrate the effectiveness of OOH advertising campaigns to advertisers. This allows brands to target specific demographics and locations, thus increasing the value of OOH.
    • Market Consolidation: The industry is facing increased competition from digital advertising and other outdoor media, and consolidation is occurring, with companies merging or being acquired by larger players.
  • Margins:
    • EBITDA Margin: OUTFRONT’s EBITDA margin was 22.9% for the first three months of 2024, declining year-over-year by -6.9%. In 2023, full year adjusted EBITDA margin was 34%.
    • EBITDA margin for the U.S. Media segment was 26.5% in the first quarter of 2024 (declined year-over-year by 10% from 29.4% in first quarter of 2023).
    • The gross profit margins were around 40%, which suggests that variable costs are high, and cost of revenue is about 60%.
    • Operating costs have been increasing due to M&A activity, rising costs associated with digital advertising, and higher lease amortization.
  • Competitive Landscape:
    • National and Regional Players: OUTFRONT competes with other large outdoor advertising companies, as well as local and regional players. Competitors include Lamar Advertising Company, Clear Channel Outdoor Holdings, and others.
    • Digital Advertising Competition: The broader digital advertising market, dominated by companies such as Google, Facebook, and Amazon, can also take share from OOH companies.
    • Local Competition: Local OOH companies typically have an advantage due to their relationships in the community, and the local markets they dominate are often less appealing to larger, national players.
  • What makes OUT different: * Prime Location: Focus on key markets and locations with high demand. Their digital billboards are placed in very important areas to maximize view ability, hence generating high revenues. * Digital Capabilities: OUTFRONT is rapidly transforming its inventory into digital displays, which offers better flexibility for both the advertisers and the company.

OUTFRONT Media is focused on increasing the percentage of revenue generated from digital displays, which is a long-term growth driver.

Financials: Let’s analyze OUT’s financials, emphasizing their performance, solvency, and operational efficiency. This will help determine its sustainability and profitability. We will emphasize most recent reports and earnings calls in this analysis.

  • Income Statement:
    • Revenue: In the three months ended March 31, 2024, total revenues for OUTFRONT were 476 million (US Media contributing 431.9 million; and the other 45 million combined from Canada and other operations), a modest increase of 1.4% year over year, but it was down from $482.7 million in the three months ended December 31, 2023.
    • EBITDA: Adjusted EBITDA for the company was $108.7 million in the first quarter of 2024, down from $123.1 million last year. The company stated that the YoY decrease in EBITDA was mainly due to higher operating expenses and lower revenue.
  • Net Income: The net loss attributable to OUTFRONT for the three months ended March 31, 2024, was $28.6 million ($0.10 loss per share). Net income attributable to OUTFRONT in 2023, was $180 million ($1.22 per share). These drastic losses and improvements show the volatility of the company and its business.

  • Balance Sheet:

    • Assets: Total assets as of March 31, 2024, were $6,256.3 million. This was comprised of property, plant, and equipment (net of $3,853.1 million), and goodwill (2,092.5 million). Current assets were a meager $145.9 million.
    • Liabilities: Total liabilities were $5,174 million, which include long-term debt (3,085.5 million) and various other short-term liabilities.
    • Equity: Total equity as of March 31, 2024, was $1,092.3 million.

The company carries a large amount of debt, which is a major concern to look out for.

  • Cash Flow:
    • In the first three months of 2024, free cash flow is $27.1 million, down from $94.7 million in the same period last year. Lower free cash flow might restrict investments and growth.
    • Capital expenditures are also increasing to support the digital transformation. This creates pressure on cash flows.
  • Debt and Leverage:
    • OUTFRONT carries a debt of 3.1 Billion as of March 2024, which is a major red flag.
    • The leverage ratio which includes Total debt / Annualized Adjusted EBITDA is around 7.1x (calculated based on the first quarter data), which signals that the company is heavily leveraged.
  • The company also has long-term lease liabilities of 731 million.

A high amount of debt and lease liabilities make the company more vulnerable to economic downturns.

  • Dividend:
    • OUTFRONT pays a substantial dividend yield, which at the price of $16.9 is about 6.5%. However the stock price has been fluctuating wildly, thus it might be difficult for the company to maintain the dividend.

Risks:

  • Economic Downturns: OOH advertising revenue is highly correlated with the general economic cycle and may decline significantly during periods of recession.
  • Competition: The OOH advertising market is highly competitive, and the company faces stiff competition from established players and new entrants. This may put pressure on margins.
  • Digital Competition: The growth of digital advertising channels puts pressure on OOH companies, requiring them to make significant capital investments for digital displays.
  • Regulatory Changes: Changes in government regulations pertaining to advertising can limit locations, and force companies to redesign certain operations.
  • Interest Rate Risk: A rise in interest rates will increase the cost of capital for the company and also make debt repayments more difficult.
  • Technological Obsolescence: Rapid development in digital advertising technology may quickly render the company’s existing equipment or processes outdated.

Business Resilience:

  • Long-term contracts: OUTFRONT often enters into long-term contracts with municipalities and other landlords, which ensure some protection to revenue decline.
  • Diversified portfolio: The diversification in multiple sectors such as transit, billboards and other digital displays increases the overall resilience of the company.
  • Strategic location: OUTFRONT has focused on strategic places with higher demand. This makes their locations comparatively resilient.

Management believes the company’s long-term growth is driven by a strong foundation in OOH advertising and they are targeting a combination of strong revenues, and continued cost optimization in their core markets. The company is focusing on the deployment of digital displays to expand its reach.

Understandability Rating: 2 / 5. While the basic operations of advertising are easy to understand, the financials are pretty complex to analyze with a lot of one-off costs, and the need to calculate values such as unlevered equity, and free cash flow. The various metrics and financial ratios can be difficult for new investors to understand completely.

  • The industry has specific terms that may be unfamiliar for new investors, which makes the business a bit difficult to understand.

Balance Sheet Health Rating: 3 / 5. There are a few concerns with the company’s balance sheet.

  • The debt levels are very high, which is a cause for concern.
  • The current assets as of March 2024 are a mere $145.9 million, which is a small fraction of their liabilities.
  • On the other hand the company has a substantial amount of assets (mostly property, plant, and equipment) of 6.2 billion.

Overall, the company faces a complex situation. It has some positives in the form of valuable assets, established business, and potential for growth, but also faces headwinds from debt, rising expenses, and a challenging competitive landscape.