|Shares Out. (in M):||0||P/E|
|Market Cap (in M):||1,910||P/FCF|
|Net Debt (in M):||0||EBIT||0||0|
Time now to learn about another name that won’t make you any money in the near future. On the bright side, gone are the days when we all dogpile VIC ideas and bid them up 10% seven minutes after submission, so I predict you’ll have plenty of time to do your scuttlebutt.
I think outdoor advertising, and CCO in particular, is one of the best businesses in the world. Today you can buy this valuable collection of properties for 6x my estimate of trough free cash flow and 3x my estimate of 2010 free cash flow. In all likelihood there is also a long, steep growth curve ahead as boards are converted to digital.
Why I Like the Outdoor Advertising Business
Basically, CCO’s network is irreplaceable. Like the railroads, new billboards aren’t being built. But even better than the railroads, for the most part new billboard construction is illegal. A rich tapestry of federal, state and local laws has made new billboard construction virtually impossible, at least anywhere you’d want to build one.
Today, and for the foreseeable future, outdoor media is one of the only media outlets that isn’t experiencing audience fragmentation. Americans are probably watching less TV on more channels – when we’re not watching shows off the DVR, surfing a growing selection of Web sites, and we have commercial-free iPods and a new radio format to listen to in the car.
Meanwhile, outdoor media is maintaining and probably growing its share of the advertising pie. As a rough proxy for mileage driven, U.S. gasoline consumption is projected to decline .3% in 2008, after growing .4% in 2007. Mileage may actually be growing since fuel efficiency is improving. Increasing traffic congestion is a boon for billboards because they capture increasingly bored eyes for longer periods of time.
Ultimately, it would be hard to mess this business up. You don’t have to worry about a programming lineup as with other media outlets. It’s also hard to imagine the medium becoming obsolete. We’ll still need to use the roads no matter what we refuel our cars with.
Digital billboard conversion has begun in earnest over about the past year, even though it’s been talked about for several years. The aggressive digital financial assumptions have been proven out. CCO posts real-time digital board pricing on their Web site at http://ratecard.clearchannel.com/RateCardExternal/frameset.asp. Digital economics, if maintained, are phenomenal for Clear Channel.
For those unfamiliar with the digital concept, a quick primer. Traditional static boards are removed and replaced with an LED face that displays an illuminated image of the advertisement. The board displays seven advertisements that rotate every eight seconds.
Digital ads are more flexible since they can be uploaded to the board remotely with almost no lead time. This attracts advertisers that previously didn’t want to make a 3-12 month commitment. For example, digital boards are great for applications that require timeliness such as movies, sitcoms, and retail promotions.
I’ve analyzed all of the cities where digital is offered and I’ve determined that on a weighted average basis digital conversion produces a 600% increase in revenue per board (the company won’t give investors these numbers). These numbers exclude New York City, which currently doesn’t allow digital. I think NYC could provide at least an additional $50 million of EBITDA 3 years after the city gives the green light on digital, if just 4% of the bulletins are converted there - for comparison they’ll probably convert 3% of the other bulletins just in 2008. I haven’t modeled NYC in because it’s impossible to know when that will happen. I’ve also ignored any opportunity to convert posters (small billboards) and international billboards, even though other outdoor companies are converting those.
Everyone in the industry I’ve spoken with thinks it’s a matter of when, not if, every city allows digital, except San Francisco, because digital provides benefits to the cities without any added safety problems. See http://www.oaaa.org/ for the digital pitch for cities and http://tantala.com/oaaa/ for a study on digital billboard safety. Basically the billboard owners agree to give some free space to law enforcement for things like Amber alerts with pictures. The safety study looks at several digital billboards 12 months before and after conversion, and finds no increase in accidents within view of the boards.
The digital bulletin ROI:
000s CCO LAMR
Capex 240 240
Incremental Rev 480 55
Incremental Margin 85% 85%
Incremental EBITDA 400 47
ROI 167% 20%
So digital has been an attractive use of capital for CCO to the extent the inventory can be sold. So far there’s been no problem selling out the inventory.
To be clear I know that fundamentals will deteriorate. At some point it’s priced in, you can decide when.
15% Cash Costs
519 U.S. Digital
2010 Avg New Boards1
567 Incremental ARPU
261 Cash Costs
15% Incremental Margin
3,309 Segment EBITDA
984 Corp. Costs
66 Corp. EBITDA
588 Interest Exp.
506 Taxes (30% blended)
152 Net Income
354 Add: D&A
330 Less: Maint. Capex
95 Add: Deferred Tax2
25 Free Cash Flow
614 Digital Capex
60 Net Debt, EOP
Intrinsic Value Price
Price to Trough FCF
Price to 2010 FCF
Management buyout. With a 10% public float, minority shareholders are powerless to prevent a buyout. We do have appraisal rights, for what that’s worth. I do regard the Mays family as self-serving. The capacity needed for a buyout exists on the Clear Channel Communications credit facility to fund a buyout. It’s not apparent to me why a buyout hasn’t taken place yet. Then again it’s also not apparent why CCO was ever taken public. I say this is a risk in the sense of having your holding period cut short, but perhaps not your IRR since a buyout would happen at a premium. Hopefully if there’s any justice in the appraisal process we’d get something moderately less than fair price but not outrageously so. In general I think the controlling shareholder issue is the biggest risk, as it’s impossible to predict outcomes when decisions are made unilaterally.
Regulation. Billboards occupy a space in local politics slightly better than pedophiles and payday lenders. The Highway Beautification Act protects billboards from local confiscation without fair compensation, but boards are rarely confiscated. Unlike most businesses though, it’s impossible to accurately predict the regulatory environment for billboards over the long term.
Inadequate demand for digital. It’s possible that market demand for the significant extra digital inventory won’t enable a rollout as rapid as I hope for. I don’t think this is a downside risk as much as an IRR risk.
Parabolic oil prices. In the event gas prices went high enough to cause people’s driving patterns to change materially advertisers might eventually demand rate cuts since impressions will have declined. But at that point we might worry more about the economy.
Deflation. Broad deflation, or just advertising deflation is a serious threat to outdoor advertising. Lease costs are fixed for 10-30 years, while rates are negotiated on short term contracts.
|Entry||10/22/2008 11:39 PM|
|Thanks for the writeup. I have glanced at LAMR before and for all the talk about this being a great business, I have been surprised by the amount of cash spent on capex and acquisitions with correspondingly little increase in EBITDA. 1) Where do you get your "digital bulletin ROI" numbers? If I am reading that correctly, why do you think CCO has had much better returns than LAMR? 2) A big part of your case is maintenance capex being about 25-30% of D&A. Where do you get your maintenance capex numbers? What are your assumptions for capex (both maintenance and growth) for Static unit, Digital unit, and corporate? Thanks.|
|Subject||CC Media Leverage|
|Entry||10/23/2008 09:05 AM|
|What are your thoughts on the debt burden carried by the parent company, Clear Channel Media Holdings (CCMO)? It looks to me like $20.7B or 9.2x EBITDA (with CCO results fully consolidated). Does it pose any risk to CCO minority shareholders in the event of a CCMO default?|
|Subject||RE: RE: CC Media Leverage|
|Entry||10/23/2008 10:55 AM|
|Thanks. That's very helpful. |
I don't fully understand your comments on a CCO bankruptcy situation, though. Why wouldn't CCMO, as the term loan holder, capture all of the 10% outstanding equity?
|Subject||RE: RE: LAMR/CCO|
|Entry||10/23/2008 05:59 PM|
|Some thoughts on the premium:|
It's worth noting that CCO generates 58% of its revenue outside of the US, where outdoor advertising is a less regulated and much less profitable business (see JCDecaux and CBS Outdoor international results for comparison).
Additionally, LAMR is further down the digital conversion path with almost 4x as many digital billboards as CCO.
The current premium is still ridiculous - if you valued CCO domestic operations at 7x, a one turn discount to LAMR, you'd get the international business for free.