Outfront Media: One Billboard Worth A Second Look (NYSE:OUT)

Outfront Media (NYSE:OUT) is a real estate investment trust (“REIT”) that provides advertising space on out-of-home (“OOH”) advertising structures in the United States (“U.S.”), and Canada. These displays are in all the top 25 largest markets in the country, including Times Square in New York.

While there are currently concerns regarding the broader advertising industry, given the current macroeconomic outlook, OOH displays have proved resilient through 2022. Part of this is due to their visibility appeal.

Unlike other forms of advertising, OOH displays are always viewable and cannot be turned off, skipped, or blocked. And the digital billboards go a step further due to their enhanced brightness and clarity. For companies really seeking to get the word out, OOH remains one of the most effective ways to do so.

And this is even more so now, given the increased foot traffic in public spaces due to waning concerns regarding the COVID-19 pandemic. As individuals increasingly cut the cord on their home-based digital devices in favor of more leisure activities, companies have responded in kind through targeted ads.

This has been reflected in OUT’s results over the past one year. But despite the positive performance and economic tailwinds, shares have underperformed and are down nearly 40% over the past one year.

For income investors, this has presented an attractive entry point to lock in a dividend payout that is currently yielding over 7%. In addition, shares offer a potential upside of over 20%. For prospective investors, this is one billboard not to be ignored.

Recent Performance

In the most recent quarter ended September 30, 2022, OUT reported topline revenue growth of 13.7%. Billboard revenues, which account for about 80% of their total revenues, were up 11.8%.

The revenue gains in turn resulted in a +$15M improvement in adjusted operating income before depreciation & amortization (“OIBDA”). In addition, YOY margins improved by about 10 basis points (“bps”).

In the U.S.-only aspect of the business, billboard revenues were up over 12%, with particular strength noted in New York and Miami. Additionally, management noted robust demand from the auto, entertainment, technology, and retail sectors.

This is likely due to companies capitalizing on greater leisure travel as a result of the continuing shift from goods consumption to more service-oriented activities.

The greater demand consequently resulted in another quarter of record billboard yields. For the current quarter, yields grew 11% YOY and were driven primarily by rate growth.

In addition to continuing strength in their billboard segment, transit revenues exhibited further improvement, with YOY revenue gains of 19% due to steadily increasing ridership levels.

Furthermore, on the digital side, transit continues to drive overall demand growth. In the current quarter, transit digital grew 51% versus billboard’s 20% increase.

This was largely due to their ongoing partnership with the New York MTA, which is resulting in an increasing number of digital installations in their infrastructure. Since renewing their contract in 2017, OUT has now installed 9,400 digital advertising displays, following the 400 installed in the current quarter.

Based on current trends, management is expecting Q4 revenues to grow in the mid-to-high single digits, with billboard and transit growing at similar rates. Given current macroeconomic conditions, this should not disappoint, especially considering the fact that total industry-wide ad revenues are expected to have grown at an annual rate of 6.6% in 2022.

Liquidity And Debt Profile

OUT remains in a strong liquidity position heading into their Q4 earnings release. Current liquidity stands at +$725M, comprised principally of availability on their revolving credit facility and their accounts receivable securitization program.

They also have over +$80M of cash on hand and have generated about +$108M in free cash flow through the first nine months of the year.

Their total debt load is also manageable, with no maturities until mid-2025 at the earliest. As a multiple of earnings, total leverage stood at 4.9x at quarter end. This is manageable and in line with expectations.

Dividend Safety

OUT currently offers an attractive quarterly dividend payout of $0.30/share. At current pricing, this represents an annualized yield of over 7%. The payout, however, is not sacrosanct.

In 2020, for example, the payout was suspended due to the uncertainties of the COVID-19 pandemic. Prior to the suspension, the company had just made a $0.38/share quarterly payment, which was up from the previous quarterly payout of $0.36/share.

When the payment was eventually resumed in late 2021, it was initiated at $0.10/share before ultimately being increased to its current level at the start of 2022. Given the uncertainties in 2020, the suspension is understandable.

After all, coverage appears adequate in its present form. In the current quarter, for example, OUT’s adjusted funds from operations (“FFO”) came in at $0.52/share. The payout ratio, thus, is about 57%. Total dividends paid out thus far are also about 88% of total operating cash flows. Coverage could be improved in that aspect, but it doesn’t necessarily result in additional risk.

Why OUT Is A Buy

In a recent report released in early December 2022, advertising forecasting firm, Magna Global, predicted that ad revenue will grow 4.8% in 2023. This is down from their previous forecast of 6.3% growth in their June report.

In addition, the firm scaled back their full-year expectations for 2022 to a growth rate of 6.6%, down from their previous forecast of 9.2%. Another report from GroupM also tempered full-year expectations for 2022 by revising their growth estimates down to 6.5% from 8.4%.

As one would expect, economic uncertainty and the prospect of slower global growth rates in 2023 were largely to blame for the reduced forecasts. Despite the expected weakness on traditional outlets, however, OOH advertising is still expected to perform strongly, with expected growth of 6%. This would take the market to +$33.5B, which would be just above pre-COVID-19 levels.

Contributing to OOH strength is the continued recovery of consumer mobility. Air travel and driving, for example, have recovered much faster than expected and are at or above pre-COVID-19 levels. And though transit is still down, that, too, has made measurable progress during the year.

The continuing strength in OOH is opportune for OUT as they are one of the largest providers of advertising space on OOH structures and sites across the U.S. and Canada. Moreover, their billboards are primarily located in the most heavily trafficked areas, including in sites in and around both Grand Central Station and Times Square in New York and along various locations in Sunset Boulevard in Los Angeles and the Bay Bridge in San Francisco.

Robust demand for billboard space drove yields to another quarterly record during the quarter and that was paired with healthy operating margins that are continuing to run higher than pre-pandemic levels. Transit revenues are still down but have improved markedly from last year.

Further increases in ridership levels, additional digital conversions, and greater demand for advertisements that are always viewable and unable to be turned off, skipped, or blocked, are several economic tailwinds that should continue to support earnings growth in future periods.

Over the past year, shares are down more than 35% and are trading at a forward multiple of 17.8x. Consistent with a prior analysis, a 20x multiple on their 2023 earnings estimate would not be unreasonable, especially considering the company’s ongoing operating strength.

At this valuation, shares would have an embedded upside of over 20%. This would be in addition to a dividend payout that is currently yielding more than 7%. For investors, OUT is an advertisement worth a second look.