Outfront Media Inc.: Growth Opportunity Slightly Discounted By The Market

Summary

• Shares in Outfront Media have increased by 38% year to date.
• The company benefits from barriers to entry due to the heavy regulation and difficulty of obtaining the right permits to billboard structures and ads.
• If the company can achieve cost efficiencies and grow revenues at a 6% CAGR, we can set a price target for Outfront at $36.6 per share.

Shares in Outfront Media (NYSE:OUT) have increased by 38% year to date. The strong price performance can be attributed to good operating performance coupled with growth opportunities ahead.

Outfront specializes in out-of-home advertising displays. The industry is enjoying tailwinds as data points indicate favorable performance metrics in comparison to other advertising mediums excluding digital, which is still the dominant way to reach audiences.

We see shares in Outfront Media as slightly undervalued. Doing a market-implied expectation analysis, we see the market pricing in operating margins below the consensus view. We expect margin compression to be mitigated once the company achieves scale within the digital billboard transformation.

Business Overview

Source: outfrontmedia.com

Outfront Media is an out-of-home advertising REIT. It has a very simple business model. It focuses mainly on providing advertisement space to its customers (either big companies or local businesses) through billboard displays or by placing ad displays in public transportation like buses.

The company benefits from barriers to entry due to the heavy regulation and difficulty in obtaining the right permits to billboard structures and ads. The company estimates that 75% of its billboard structures benefits from this competitive advantage, as such structures were built under laws allowed at that time but cannot be constructed under current laws.

The company owns the billboard structures but it leases the land beneath it. As of the last annual report, Outfront had 20,800 lease agreements with 16,900 different landlords. These contracts can last multiple years or could be short term (one month) in duration and are very flexible, allowing the company to terminate or negotiate better terms with landlords under certain circumstances.

The value proposition Outfront provides potential customers is simple as well. Billboard ads and other out-of-home advertising displays are an effective way to advertise to mass audiences. These ads cannot be skipped, fast-forwarded

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.