We have been buyers of Outfront Media (NYSE: OUT) in recent months, taking advantage of the opportunity to buy shares below the $20 per share level and assuring a return between 6% and 7%. This is not a trade, but a long-term hold on some of our portfolios, so the next few quarters aren’t really important to us; instead we are focused on the next 5 to 10 years and what that means for this business moving forward. . That said, the upcoming quarterly results will be revealing and should give investors an idea of how the billboard business will be affected by this environment of high inflation and rising interest rates.
Readers may remember that the last time we covered Outfront Media it was a time of great transition for some of the billboard companies; especially those with exposure to certain foreign markets and transit listing inventory in the largest US MSAs. We argued that eventually ridership would return and advertisers would have to find available inventory (with billboards in high demand, some ad dollars would return to transit, even if less travel was done post-COVID, due to the NEED to advertise).
We have been right on many of our predictions and it looks like we should see almost all of them come to fruition with Outfront’s current quarterly results due out on Thursday.
So what should investors pay attention to?
The most important metrics, in our opinion, are billboard revenue and profit margin, which will tell investors if there is still demand for Outfront’s inventory. For this quarter, it should be, but management should also have a pretty good idea of the next quarter with a month already on the books. Guidance on the US billboard segment, which will be based in part on the data they already have, will be key as some small businesses are struggling with staff shortages and inflation hurting profits. . If the demand is still there, especially if it comes to national and local accounts, it would obviously be bullish for investors heading into the fourth quarter, historically the strongest of the year for the company.
The problem child for Outfront, and for some other players as well, has been the transit business. Traffic hasn’t picked up for a myriad of reasons, including but not limited to working from home, companies relocating workforces, people refusing to use public transportation, and crime and problems. of homeless people in public transport systems.
The good news is that ridership is slowly increasing, with even the New York MTA showing that over the past 8 months, subway ridership as a percentage of pre-COVID traffic has risen from the low 50% range to low range of 60% on most business days. and that on weekends, with entertainment venues open again and sports allowing spectators again, ridership is approaching 80% of pre-COVID levels. Some forms of transportation have fully recovered, as can be seen in the bridge and tunnel data below.
So while fewer people may be coming to work in New York City, they have chosen alternative means of getting to their destination.
The ridership issue is much the same in San Francisco, another area of interest to Outfront shareholders, with data showing that as of June 2022, traffic was still back at 56.66% of pre-lockdown levels. pandemic. While that seems abysmal, the number of cyclists was up a little over 53% in June 2022 compared to the same period in 2021… that’s something.
As bad as this all sounds, we think the good news is that Outfront’s management team has been able to capitalize on its assets and possibly outweigh the $100-125 million increase in US transit revenue that we mentioned in March. . The company is basically just below that level of revenue for two quarters, and those should be the smallest two quarters in terms of revenue for the year (it’s worth mentioning that they were the easiest comparisons), so after this quarter we will most likely be revising our estimates for the transit business upwards.
What about distribution?
We think the dividend/distribution is pretty safe at the moment, even with some hiccups in the economy right now. Is Outfront’s geographic footprint ideal for today’s environment? No, but as the economy continues to open up in major MSAs and people return to their pre-pandemic habits, we would expect Outfront to continue to benefit. With a strong tailwind for the US billboard business, and the Canadian and transit segments increasing, we believe distribution is not only fairly safe at the current rate, but the company may consider ramping it up in the coming years. quarters. .
While the debt load is considerable here, with what was a rich average coupon rate before the Federal Reserve aggressively raised interest rates, we think investors can rest easy knowing the company doesn’t have a maturity to address. through 2025, and barring any major acquisitions, we think they can handle that roll in a way that might not see a significant increase in the company’s annual interest expense or cash flow.
Outfront has been aggressive, though not as aggressive as competitor Lamar Advertising (LAMR), on the mergers and acquisitions front. The billboard business will continue to be a cumulative game, and we expect Outfront to have some small acquisitions to report, because those complementary or cumulative plays are the most profitable for a player like Outfront. There’s certainly enough firepower to make a bigger deal, but we’d point out that some sellers may have some remorse for not pulling the trigger sooner as they see interest rates soar and buyers get a little more choosy. with the assets they want to offer. in.
our final thoughts
We own this name and we like it because it gives you a solid annual payout along with the opportunity to participate in a significant upside in the event the economy doesn’t crash completely. In the current environment, we don’t see any reason why this can’t get back to the $25 per share level in a quarter or two of good results with an increase in passenger data for the transportation side of the business. If billboards can maintain their current level of demand, then transit could provide the next step for stocks, and if that happens, stocks could test their highs.