OUT - Outfront Media: Our Take On Q1 Earnings And The Future

2023-05-10 02:23:29 ET

Summary

• While YoY revenue growth was positive for Q1, weakness in national appears to be showing up in the billboard/out of home market as well now.
• Outfront needs to add more digital inventory which will increase CapEx, but lower operating costs, increase margins and help grow revenues.
• Management reaffirmed their expectation to meet full year guidance.

As readers know, we have been bullish media names going back to the pandemic. We established many core positions then and have since traded in and out of certain names. In some portfolios we still have some low cost basis positions, but in recent months we have seen the majority of our current positions turn red. We still like the names we own; however we are starting to see the first major cracks in the ad market and it has caused us to be a little more conservative in where we put money to work. To be fair, some of the best value plays we have continued to buy have burned us recently, which is why we think investors need to be strategic in names that they purchase.

Within media, the billboard industry is one which we especially like due to the scarcity of new sites and the value from established sites. One of the names we own, Outfront Media ( OUT ) reported their Q1 results last week and we think that there were some key takeaways from the results and conference call.

Billboards Still Showing Strength

First things first. Billboards are still one of the bright spots in the ad market outside of tech (search and social). While many of the other ad supported media names struggle, from television to radio, billboards are showing strength as advertisers recognize the unique value proposition billboards afford their campaigns; especially local advertisers.

Billboards Not Immune To Weakness

While we thought that there was good news in Outfront's Q1 earnings report, especially with the headline being that revenues were up 6% year-over-year, there was also enough data in Q1 to show us that the headwinds affecting other media names is starting to creep into all corners of the ad market. That, coupled with the fact that expenses are increasing as more space is rented to advertisers is creating a situation where revenues may remain relatively strong, but margins and income for Outfront are under pressure.

Take a look within the numbers that Outfront reported for the U.S. business and the breakdown of Local and National Revenues:

Like almost every other ad supported media business, Outfront saw local revenues outpace national revenues. Due to the strength of the billboard market, and being in the correct markets, national was actually positive by 1.3% year-over-year. While that national growth is impressive when looking at various other reports from media companies this quarter, it does show the national media names are pulling back across the board.

In Q4, Outfront saw national revenues increase by 5.4% while local revenues increased by 8.3% - so while local revenues remained strong (and actually got stronger in their year-over-year growth) national's growth slowed so much that total revenue growth slowed from last quarter's 7.0% level.

M&A Slowing Down

We have previously discussed the benefits of tuck-in acquisitions within the billboard industry and how adding those boards within a market you already operate in can help increase margins and cash flows. Outfront has done a good job of managing a pipeline of deals and executing on them quarter-to-quarter. According to Matthew Siegel, the company's CFO, in Q1 2023 they "made $5 million of tuck-in acquisitions in the quarter." A couple of these were being worked on last year and closed in 2023. With that said, it appears that management expects to see lower volumes on both the number of deals (and boards) and money spent on M&A in 2023.

New York And Transit

The New York City billboard market is strong, as it continues to rebound from COVID-lows. With the digitalization of the MTA, Outfront's management indicated that ridership does not need to get back to pre-COVID levels as they are now able to get the same impact with fewer riders. Their ability to penetrate a market and deliver impressions is greater with the digital inventory, which has management talking about not needing to see numbers improve much above 80% for ridership in order to get back to 100% of 2019 revenue levels.

Moving Forward

While Outfront's business may be seeing the tailwinds disappear from the last couple of years, management still has a number of levers to pull to keep the ship moving forward. They can continue to focus on bolt-on and tuck-in acquisitions which is a good way to deploy cash in this industry, however we think that it might be time for them to put more focus on converting their billboards to digital. Jeremy Male, Outfront's CEO, discussed how digital inventory makes up less than 4% of their total inventory with most of the inventory being static. Servicing Outfront's "tens of thousands of static boards" (as Mr. Male described it) costs money and requires equipment and staff. Converting high traffic boards to digital would enable the company to increase revenues while also lowering costs which might be the best use of their capital moving forward; especially if management believes we might be heading into a recession.

Final Thoughts

We are holding onto our current positions in Outfront Media but want to see how ad spending holds up and whether national advertisers are pulling back across various forms of advertising as a way to cut costs in the current inflationary environment. The dividend will be nice to continue to collect, but we will not be adding to our current positions simply because a yield looks good. The REIT space might come under some serious pressure if the Fed holds rates higher for longer and we are forced to deal with a recession. Due to that fear, we remain bullish on the industry as a whole but are holders for the next few months.

For further details see: