Outfront Media: Avoid The Company For Now

| About: Outfront Media, (OUT)
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Outfront Media has received a number of upgrades in the past month.

New York's MTA contributes more than 10% of the company's revenues.

The MTA is evaluating potential companies for a 10-year contract currently held by OUT.

Outfront Media (NYSE: OUT) has received a few positive press such as the recent contract wins in Massachusetts and Washington, the recent sale of the Latin America division, and the recent earnings and revenues beat. This has led to the stock recovering from the all-time low level it reached in February last year. The company is currently trading at $25.05, a few points up from its 2014 IPO price. In the recent Q4 conference call, the management was upbeat about the 2017 performance. However, in this article, I will highlight the reasons why investors should avoid the company for now.

Outfront Media is one of the largest out-of-home (OOH) advertising platforms in the United States and Canada. In April 2016, the company exited the Latin America market to focus on the profitable North America region. The company, which currently operates as a REIT generates revenues by leasing billboard and transit systems to companies. It competes with companies like Clear Channel Outdoor Holdings (NYSE: CCO), JCDecaux, and Lamar Advertising (NASDAQ: LAMR).

In the recently announced quarter, OUT announced revenues of $397.4 million, which was higher than the previous quarter by $14 million. This was however, $1 million lower than the same quarter in the previous year because of the impact of the Latin America divestiture. In the quarter, billboard revenues were down 0.9% to $276 million while transit revenues increased by 1.2%. The company increased its quarterly dividend by 6% to $0.36. In the year, OUT paid $188.6 million in dividends while maintaining a healthy balance sheet.

Although the company’s revenues and guidance were impressive, it faces one major risk that exposes it to major headwinds in the future. In the United States, New York is the company’s largest market with more than 466 billboards and more than 179,000 transit displays. In total, these generate approximately 26.7% of the company’s total United States revenues as shown below.

Source: OUT

For more than 80 years, OUT has succeeded in providing revenues to New York city by providing advertising in the subways, buses, and commuter railroads. In March 2016, the Metropolitan Transportation Authority (MTA) released a Request for Proposal (RFP) inviting companies interested in having the rights to provide digital and traditional advertising in the three mediums. The winning company will provide these services for a period of 10 years unless the contract is cancelled. In November, MTA extended OUT’s contract by 6 months after it refined its bid requirements.

The announcement for the winning bid is expected to be made before June 30th when the current contract ends. Investing in the company (for now) is therefore risky because no one knows what the authority will decide. There are a number of scenarios. One, the authority can give the company the entire contract especially based on their previous relationship. Second, the authority can turn down OUT’s proposal in total. Third, the authority can share the three concessions among different firms.

Asked about the current MTA situation in the February conference call, John Male, the company’s CEO said the following:

In November of last year, the MTA extended all of our contracts to the end of June 2017, unless earlier terminated by the MTA on 90 days’ notice. Right now, we have no further updates with regards to the MTA process and we continue to work hard to maximize the value of these assets for both the benefit of the MTA and our shareholders.

The third quarter conference call came after the company won the Massachusetts Bay Transportation Authority (MBTA) contract. In this call, John said the following about the process at that time:

I think MBTA in particular, when you look at what the MBTA was looking for, actually it sort of looks and feels I think quite similar to some of the key pieces of the MTA's likely requirements. So we feel in a good place, but this has obviously got a long way to run. And we'll have to wait until that process finalizes, which is likely in the early part of 2017.

These statements show that the management is in a wait-and-see situation waiting for the outcome of the procurement process.

If the contract is awarded to another company, the situation would be challenging for OUT. As shown in the chart above, in the United States, the transit segment contributes almost 30% of the total revenues while the billboard segment contributes the rest.

In the transit segment, New York contributes 56% of the revenues, which is more than the other cities combined. In 2016, the company had total revenues of $1.4 billion, meaning New York contributed approximately $150 million. According to MTA, in 2015, the advertising revenue was $158 million. Therefore, losing this contract would mean that the company would lose more than $100 million annually or $1 billion in 10 years.

Final Thoughts

This analysis does not mean that OUT is a bad company. In fact, chances are high that the company will win the contract. This is based on the company’s deep understanding of the New York market, its reputation with the MTA, its recent digital investments, and the recent contract wins in Massachusetts and Washington. The company has also done a few good things such as divesting in the Latin America market, which was lagging behind for years. This divestiture has also helped the company reduce its currency exposure in different markets.

However, buying the company for now means exposing yourself into so much risk because no one knows the outcome with MTA. As highlighted above, even the management is in a wait-and-see situation hoping for the best. In addition, it is expected that the advertising industry will have a sluggish growth in 2017 after a bumper year in 2016.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.