Downgrading Clear Channel Outdoor Holdings On Continued Bottom Line Weakness

seekingalpha06-06

Clear Channel Outdoor Holdings has seen its stock plummet 51.9% since April 2022, underperforming the market.While revenue has grown, the company's bottom line results have worsened, leading to a ...

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Jacobs Stock Photography Ltd/DigitalVision via Getty Images Every investor makes mistakes. Sometimes, these are small mistakes. Other times, they can be rather substantial. An example of a mistake that I made in 2022 was in my analysis of Clear Channel Outdoor Holdings (NYSE:CCO). For those not familiar with the company, it operates as one of the largest out-of-home advertising companies in the world. The company used to be larger than it is today. However, in order to simplify operations, management has sold off many international assets. Even with this, however, by the end of 2023, the business had over 325,000 print and digital displays spread across 19 different countries. Conceptually, this is a market that I find very appealing. It is diverse, as such, requires very little in the way of maintenance, and, in theory, cash flows should be rather robust. However, firms like this do tend to take on a great deal of debt in order to fuel growth. And that is exactly what has transpired here. Of course, I knew this when I wrote about the company in April of 2022. In that article, I felt as though the positives and negatives balanced out well, leading me to rate the business a ‘hold’ to reflect my view that shares would likely perform more or less in line with the broader market. However, the stock has actually plummeted 51.9% since then, which is far worse than the 19.3% increase seen by the S&P 500 over the same window of time. Given this drop, you might think that I would finally turn bullish on the business. However, while shares have gotten cheaper during this time, and while revenue continues to grow at a respectable pace, bottom line results are showing signs of worsening. It has gotten to the point where I believe that there are definitely better opportunities that can be had elsewhere. Because of this, I have decided to downgrade the company to a ‘sell’ since I believe that the stock is likely to underperform the market moving forward as well. When growth isn’t worth it Fundamentally speaking, Clear Channel Outdoor Holdings has been a mixed bag over the past couple of years. To start with, we should cover results for the 2022 and 2023 fiscal years. From 2022 to 2023, revenue for the company increased by 5.6% from $2.01 billion to $2.13 billion. This increase, according to management, was driven by a higher revenue in its Airports segment, as well as in the Europe-North segment as demand increased and as the company continued to make investments in digital infrastructure. The business did report some weakness in the America segment as a result of pain in the San Francisco/Bay Area market and associated with its Media/Entertainment operations. Author - SEC EDGAR Data Some of this justifies a bit more detail. As an example, let's touch on the Airports segment first. During 2023, revenue for this segment totaled $311.6 million. That was up a whopping 21.5% compared to the $256.4 million reported for 2022. It was also nearly double the $160.3 million in revenue generated for the segment back in 2021. The fact of the matter is that the airline industry was severely negatively impacted by the COVID-19 pandemic. This is a topic that I have written about before. In the chart below, for instance, you can see global enplanements during the pandemic compared to the time prior. Naturally, with the pandemic long gone, air traffic has returned. In fact, this year, it's expected to surpass the levels that it was at in 2019. So it only stands to reason that this segment would perform exceptionally well as a result. Author - Airports Council International The Europe-North segment, meanwhile, reported revenue growth of 9.4%, with sales climbing from $566.1 million in 2022 to $619.6 million last year. This increase was driven by overall stronger demand, particularly involving the street furniture operations that the company has. The deployment of additional digital displays, as well as new contracts, certainly helped. In fact, management said that digital revenue on its own jumped 13% year over year. That took it up from $299.5 million to $338.4 million. Even though revenue improved nicely, profitability took a hit. Net income went from negative $96.6 million to negative $310.9 million. Part of this pain can be chalked up to a surge in interest expense from $360.6 million to $421.4 million. This came about as net debt grew from $5.28 billion to $5.38 billion. In addition to this, the effective interest rate that the company had to pay, on a net basis, jumped from 6.87% to 7.83%. This was the result of higher interest rates globally. Even if we exclude the interest expense from the equation, the company would have been worse off on a year-over-year basis. A rise in depreciation and amortization costs from $217.8 million to $241.8 million, a jump in other operating expenses from $2.1 million to $11.8 million, a reduction in the tax benefit attributable to continuing operations from $80.4 million to $17.2 million, as well as other factors, hit the company’s bottom line quite a bit. It is true that if we exclude discontinued operations, then the decline in profits would have been more modest from negative $47.3 million to negative $157.1 million. But even that is painful to see. Author - SEC EDGAR Data Other profitability metrics for the company were down across the board. Operating cash flow dropped from $140 million to $31.3 million. If we adjust for changes in working capital, we get a decline from $515.8 million to $359 million. FFO, or funds from operations, fell from $169.1 million down to only $57.1 million. On an adjusted basis, this metric fell from $164 million to $83 million. And lastly, EBITDA dropped from $544.9 million to $535.2 million. As you can see in the chart above, pain for the company continued into the 2024 fiscal year. While revenue increased in the first quarter compared to the same time one year earlier, every one of the company’s profitability metrics, except for adjusted operating cash flow and EBITDA, worsened on a year-over-year basis. With results like these, it's no wonder that the stock took a hit too. When it comes to the 2024 fiscal year in its entirety, management does expect revenue of between $2.20 billion and $2.26 billion. This should represent a year-over-year improvement of between 3% and 6%. When it comes to profitability, the pictures also expected to improve, but only marginally. Adjusted FFO, for instance, should be between $80 million and $105 million. Meanwhile, EBITDA is expected to grow to between $550 million and $585 million. These figures imply FFO of around $63.6 million and adjusted operating cash flow of about $380.7 million. Author - SEC EDGAR Data In the chart above, you can see how shares are priced. Normally, I would consider these to be very attractive levels, particularly for a company in this space. But sometimes, a low multiple is warranted. It is worth noting that shares still remain cheap compared to two similar firms, as shown in the table below. On both a price to operating cash flow basis and on an EV to EBITDA basis, Clear Channel Outdoor Holdings ended up being the cheapest of the group.   Company Price / Operating Cash Flow EV / EBITDA   Clear Channel Outdoor Holdings 2.1 11.6   Lamar Advertising Company (LAMR) 15.7 15.9   Outfront Media (OUT) 8.8 12.6   Click to enlarge As I wrap up this article, there is one more thing that I would like to touch on briefly. Those who disagree with my decision to downgrade the stock might point out that continued improvement in this space is likely to occur. And I would agree with that assessment. In fact, we have already seen some nice improvement, as the image below illustrates. Global out-of-home spending for advertisements peaked at $31 billion in 2019. This represented a 4.3% annualized growth rate from 2010 through 2019. However, industry revenue plummeted to only $23.4 billion in 2020. Management has not provided industry data for 2023 yet. That should come out this September. But by 2022, the industry had recovered to revenue of $29.8 billion. A lot of this growth has come from traditional out-of-home advertising revenue. However, the company continues to benefit from rapid growth and growing market share associated with digital out-of-home spending. In the long run, I fully expect this trend to continue. But until we see bottom line results for Clear Channel Outdoor Holdings improve, it's difficult to be terribly optimistic. Clear Channel Outdoor Holdings Takeaway  As much as I hate the idea of downgrading a company that I find appealing from an operational perspective, the fact of the matter is that Clear Channel Outdoor Holdings is heavily leveraged and its bottom line results are suffering. I would wager that a decline in interest rates should prove bullish for the business to some extent. But what management really needs to do is pay down debt. Until we see some improvement in profitability, or some big reduction in debt, I think that downgrading the business to a ‘sell’ is logical.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2441155667"}