OUTFRONT Media Stock: Overlooked 9.6%-Yielder Has 45% Upside
December 21, 2023
Why OUT Stock Has Been Rising (& Could Keep Rising)
OUTFRONT Media Inc (NYSE:OUT) is a real estate investment trust (REIT) that has faced the same kinds of headwinds that other REITs have: in particular, rising interest rates.
Higher interest rates make it more expensive to borrow capital and service debt, which weighs down on a company’s bottom line.
Moreover, due to the circumstances of the niche market that OUTFRONT Media serves—mobile (transit) and outdoor advertising—its fundamentals were upended more than those of most companies during the COVID-19 pandemic.
Quarantine orders and the shuttering of businesses put a big dent in the earnings of the outdoor and mobile advertising sector.
With the economic effects of the pandemic mostly being in the rearview mirror, interest rates expected to be reduced, and fears of a recession fading, things are looking up for OUTFRONT Media Inc. A decrease in inflation and a soft landing for the U.S. economy are expected to help boost U.S. retail sales.
Analysts forecast that, in 2024, U.S. gross domestic product (GDP) growth will come in at 1.5%, the inflation rate will fall to 2.5%, U.S. retail sales will grow by 6.5%, and online global sales will expand by 11%. (Source: “2024 Advertising Trends Report,” OUTFRONT Media Inc, last accessed December 12, 2023.)
That should encourage advertisers to pull out their wallets.
On top of that, many businesses have moved their advertising from direct mail and other traditional media models to more out-of-the-home (OOH) and digital platforms. In fact, OOH media is projected to become the sole traditional media format to experience growth. Furthermore, it has some of the highest recall rates among all advertising formats.
All of this, of course, is great news for OUTFRONT Media Inc. The New York City-based company is a specialty REIT that provides advertising displays on outdoor structures and sites in the U.S. (and Canada, for now).
The company’s assets consist of billboards that are primarily located on the most heavily traveled highways and roadways, and transit advertising displays that are under exclusive multiyear contracts with municipalities in 50 of the largest metropolitan areas from coast to coast.
Its 500,000 advertising “canvases” reach seven out of 10 Americans every week. It has had displays in approximately 150 markets across the U.S. and Canada, including the 25 largest markets in the U.S.
The REIT currently has two business segments: 1) U.S. Billboard and Transit (which is part of its U.S. Media reportable segment) and 2) International. (Source: “Form 10-Q: OUTFRONT Media Inc.” United States Securities and Exchange Commission, November 3, 2023.)
In October, however, OUTFRONT Media announced that it was selling its Canadian business unit to Bell Media, a subsidiary of BCE (NYSE:BCE), for CA$410.0 million (about US$300.0 million). The transaction is expected to close sometime in 2024. (Source: “OUTFRONT Media to Divest its Canadian Business to Bell Media,” OUTFRONT Media Inc, October 23, 2023.)
In 2022, OUTFRONT Media’s Canadian unit generated revenues of $91.9 million. As of December 31, 2022, the Canadian unit had 9,325 advertising displays.
“The sale of our Canadian business highlights the value of our assets and will provide us with additional financial flexibility as we focus on our U.S. assets,” said the company’s chairman and CEO, Jeremy Male. (Source: Ibid.)
Third-Quarter Financial Results
OUTFRONT Media’s business has continued to recover from the pandemic, with back-to-office policies helping juice advertising campaigns.
The REIT’s revenues inched up in the third quarter by 0.2% year-over-year to $454.8 million. Its billboard revenues went up by 2.6% year-over-year to $363.6 million, while its transit and “other” revenues decreased by 7.6% to $91.2 million. (Source: “OUTFRONT Media Reports Third Quarter 2023 Results,” OUTFRONT Media Inc, November 2, 2023.)
The company’s third-quarter net income fell to $17.0 million, or $0.09 per share, from $40.8 million, or $0.23 per share, in the same period of 2022.
OUTFRONT Media Inc’s funds from operations (FFO) came in at $73.4 million (down from $88.0 million in the third quarter of 2022). Meanwhile, its adjusted FFO (AFFO) was $75.7 million (down from $86.5 million in the third quarter of 2022). The lower FFO and AFFO were primarily due to higher interest expenses and the impairment of non-real estate assets.
Male noted, “As expected, third quarter revenues were up slightly as a result of higher billboard revenues and strength in our local business.” (Source: Ibid.)
Management Maintains Quarterly Dividend at $0.30 Per Share
The pandemic was not kind to many businesses, including OUTFRONT Media Inc.
The REIT suspended its $0.38-per-share quarterly dividend in the middle of 2020 and reinstated it at $0.10 per share in the second half of 2021. Management then tripled the payout to $0.30 per share in early 2022. It has held the dividend at that level since then. (Source: “Dividend History,” OUTFRONT Media Inc, last accessed December 15, 2023.)
As of this writing, that works out to a yield of 9.58%.
OUTFRONT Media stock’s dividend is safe, accounting for just 72% of the company’s AFFO. That means there’s room for the REIT’s board to increase the payout if it so chooses. However, it might make sense for the board to wait for the economy to fully recover before hiking OUT stock’s payout again.
OUTFRONT Media Stock Up 50% Since Early October
OUT stock’s share price has been doing quite well since early October, rallying by an impressive 50% (as of this writing).
Since the second half of October, OUTFRONT Media Inc has announced the sale of its Canadian business and reported healthy financial results. Perhaps most importantly (at least for REITs), on November 1, the Federal Reserve held its key lending rate at the range of 5.25% to 5.5%.
Wall Street analysts expect the Fed to start cutting interest rates in the middle of 2024.
Analysts also believe that, even with its recent rebound, OUTFRONT Media stock is seriously undervalued. They’ve issued a 12-month share-price forecast in the range of $14.50 to $18.00 per share. This points to potential upside in the range of 17% to 45%.
Chart courtesy of StockCharts.com
The Lowdown on OUTFRONT Media Inc
As mentioned earlier, OUTFRONT Media is a specialty REIT that operates billboards and transit advertising campaigns across the U.S. and Canada. While the company’s business took a hit during the pandemic, the subsequent lifting of quarantine orders and the implementation of back-to-office policies have led its business to rebound.
OUTFRONT Media Inc recently announced that it would be streamlining its operations by divesting its Canadian operations in order to focus on its U.S. operations. That move has made Wall Street analysts increasingly bullish on OUT stock.
While buy-and-hold investors wait for OUTFRONT Media stock’s share price to recover, they can sit back and enjoy its inflation-crushing dividends.
