Quick Pitch: We see Outfront Media (“OUT”) as one of the most straightforward COVID recovery plays. OUT is a decent quality company with no liquidity or covenant risk, limited downside, and in a growing demand and constrained supply industry that is secular and could return to 2019 earnings by 2022 or 2023 (if have a vaccine by mid-21). OUT could also benefit from accretive M&A by acquiring distressed assets, but we don’t bake this into our base case.
Company Description: OUT operates as a public REIT with >5% dividend yield (pre-COVID) and is one of the largest providers of advertising space on Out-of-Home (“OOH”) advertising structures and sites across the U.S. and Canada. Its portfolio primarily consists of billboard displays in densely populated / major metros, along with transit displays driven by multi-year exclusive contracts in large cities.
Risk/Reward: When there was peak uncertainty in the market and investors were unsure of the liquidity / bankruptcy potential, OUT shares troughed at $8 on March 20th. Since then, a bit more certainty has returned to the world, OUT has renegotiated covenants, juiced up its balance sheet (hence, no liquidity risk and in fact OUT now has capacity to acquire distressed assets), given investors clarity on trough business trends, and has received a $400mm convertible preferred investment from Providence Equity. Shares are unlikely to go back to the March low. Downside is likely somewhere ~$12-13, based on 12x FY21 EBITDA of $344mm and assuming a prolonged recovery by FY23. We see upside @ $25, based on 12x FY19/FY22 EBITDA of $522mm, assuming a recovery by FY22. Note that 12x is where it has historically and consistently traded for over 5 years. This leads to a compelling 5:1 risk/reward skew, w/ ~75% upside and 10-15% downside. This is an extremely straightforward play with minimal downside risks, and patient investors will get paid over the next 12 or so months as business trends return. You’ll get paid with compelling risk/reward even if you aren’t a fan of a LSD-MSD % growing industry and/or have concerns about the industry longer term.
Note that OUT is down ~45% YTD vs. peer LAMR -25% YTD. The main difference here is that LAMR has a predominantly local business skew, where traffic trends have recovered more quickly vs. OUT’s national and transit businesses that generate 37% of rev from NYC and LA alone. As traffic continues to return in OUT’s markets, it will outperform LAMR and even outperform the market. Traffic trends (leading indicator), have been already improving, giving confidence to advertisers to resume spending in OOH markets where eyeballs have returned. Some of LAMR’s local markets have already seen traffic trends above pre-COVID levels, hence LAMR’s outperformance vs. OUT.
OUT is a 2014 CBS spinout and operates as a public REIT and is a one of the largest providers of advertising space on Out-of-Home (“OOH”) advertising structures and sites across the U.S. and Canada.Its portfolio primarily consists of digital and static billboard displays in densely populated / major metros, along with metro transit (buses, subways) displays driven by multi-year exclusive contracts in large cities. Billboard contracts are structured from ~4 weeks to 1 year, though digital is shorter than static. The company currently has ~41K static and 1.1K digital billboards
In FY19, 67% of revenues came from billboards, and 33% from transit. OUT’s largest transit contract is with the NYC MTA. 44% of OUT’s revenues are from “national” markets which include top metros / cities, and ~92% of revenue is from the U.S. NYC and LA account for 37% of revenue (Figure 1). This differs drastically from close peer LAMR, which has 75% of revenue from local and only an 8% transit business.
Figure 1: Revenue by Market, Source: Company
Figure 2: Misc Company Data, Source: Company
OOH Industry Overview: Supply and Demand Dynamics
Out-of-Home ad spend, while only ~4% of total US media spend, is the only non-Internet based ad medium to show material organic growth in recent years, typically tracking GDP growth. This stems from the combined benefits of a growing audience, constrained inventory supply, and increasing use of digital displays and data driven selling. OOH is basically the only part of traditional advertising that’s still growing, not losing share to digital, and had even shown acceleration prior to COVID (Figure 3).
The billboard space is highly regulated, and transit deals typically occur through exclusive multi-year contracts. You can’t just build a billboard anywhere, there are highway (e.g. 1965 Highway Beautification Act) and municipal caps and licenses are heavily regulated, which makes the industry extremely lucrative given consistently growing demand amidst constrained supply. In fact, because of regulation, billboard operators like OUT that own billboard licenses typically have pricing power over the lessors of the land where billboards are located, as government regulations often prohibit anything else from being built on the land. This has given OUT flexibility to renegotiate lease expenses with lessors during the COVID crisis.
The U.S. market has three key players, LAMR, CCO and OUT, with the rest of the industry highly fragmented among ~125 independent companies (Figure 4)
Demand for OOH is secular and continues to grow. Advertisers love this advertising medium because a) it’s good for brand building, b) it’s cost effective vs. other channels (i.e. ~$5 CPM vs. TV @ $17, print @ $25, internet @ $7) (Figure 5), c) targets a true mass audience that continues to grow as traffic grows across the U.S., d) it’s harder for consumers to block out / skip ads, e) brands have full control over the experience, as ads are not surrounded by any other content
OOH has continuously been a stable advertising medium for garnering brand awareness, which is why big brands like APPL, MCD, TMUS, AMEX, UBER, Geico, etc consistently rely on it (Figure 6). AAPL, for example, consistently spends ~10% of its budget on OOH. Because of this, OUT has had 0% churn in its top 10 customers over the past 3 years, and only 6% churn among the top 100.
Figure 3: Media Spend Growth by Medium. Source: Company
Figure 4: US Market Share by OOH revenue. Source: Company
Figure 5: OOH vs. Other Media Types. Source: Company
Figure 6: OOH Spending by Brand. Source: Company
Liquidity and Cash Burn
OUT acted quickly to bolster its balance sheet at the onset of the COVID crisis, cut expenses, postponed growth capex investments, raised $400MM via a convertible preferred note with Providence Equity, and cut its dividend to preserve liquidity. This has left the company with availability liquidity of ~$1.3Bn. Even if you bearishly assume OUT revenues are down 50% (which is MGMT’s 2Q guide) for the rest of the year, it would only burn ~$190MM of cash excl. dividends. In addition, the company renegotiated covenants to exclude 2Q/3Q20 EBITDA from its net secured maintenance covenant calculation (4.5x) until September 2021, which has derisked the possibility of a covenant breach.
M&A: Call Option
Given the liquidity situation described above, OUT is in a position to acquire assets from distressed billboard operators, and management has mentioned that they believe COVID-19 will accelerate the industry’s need to consolidate. Though purely speculative, it could make sense for OUT to acquire some of distressed CCO’s assets – often times, CCO and OUT have billboards that are side by side. Such a deal would likely be viewed as highly accretive. This is a pure call option and we don’t bake this into any of our analysis.
Transit and Minimum Guarantee
OUT has ~20 significant transit contracts, the largest which is the NYC MTA. About 1/3 of OUT’s transit revenues are from bus shelters, which are slightly less impacted than below ground travel. However, the other 2/3 will be heavily impacted by COVID. Given the way these transit contracts are structured, OUT has to pay ~$228mm per year in “minimum guarantees,” even if the revenue from transit is below this amount, which is the case vs. OUT’s guided 2Q run-rate transit revenue of $150MM (-75% YoY).For April and the time being, MGMT mentioned that, in agreement with the MTA, they did not pay their minimum guarantee, are not accruing, and so far have been paying transit fees variably. Going forward, they are still renegotiating their contract to determine how this guarantee flexes. At the end of the day, controversy with OUT’s transit agreements often creates opportunities with the stock as transit is <35% of revenue, even lower margin, and so a relatively smaller part of the value of the company. If they have to pay their minimum guarantee going forward, there may be slightly more cash burn, but this doesn’t change the two year recovery story or create a liquidity issue.
Valuation and Risk/Reward
OUT has historically and consistently traded at 12x fwd EBITDA (Figure 7). Almost all agencies we speak to discuss pent up demand and expect a full 2022 recovery back to 2019 sales if a vaccine is out by 2Q21. Based on this FY22 recovery, 12x FY19/FY22 EBITDA of $522mm would imply a $25 stock by the end of 2021, and the stock will likely get there ahead of that on the pure sentiment of a normalizing market. If you assume a 2023 recovery instead, you’d have a $20 stock by the end of 2021 based on FY22 EBITDA of $460mm, which still gives you a >3:1 risk/reward including dividends, in a pretty conservative scenario. Even in this lagged recovery scenario, if you take 12x FY21 EBITDA of $344mm, you’d have a $13 stock, which is where we see as the absolute bottom.
Coming out of COVID, there may be a few call options, none of which we bake in here: a) accretive M&A of distressed assets, b) accelerated decline of TV/Print/Radio advertising, leading to ad dollars going to secular channels like OOH, though we imagine most of that will go to online.
Figure 7: OUT EV/NTM EBITDA 2016-2020. Source: Bloomberg