Clear Channel Outdoor, The Forgotten Company
During the pandemic, outdoor advertising collapsed. Not only because no one was outside to watch any ad panels for some months during the peak of the pandemic. It also started what many analysts believe to be a long term trend, “The rise of digital ads on social media”. The general consensus is that people nowadays spend much more time looking at their cellphones than before. Even when they are outside. The generalized forecast is that this trend is only here to stay and that in coming years people will continue to spend more time looking at their smartphones.
This general consensus and fear of long term impact in consumer behavior, has left outdoor advertising companies out of the reopening trade and rebound in valuations. For this reason, many of those companies are trading at impressively low valuations. The biggest example of these industry in our opinion is Clear Channel Outdoor.
The generally accepted forecast has led this company to be a value investment opportunity. Regardless of how accurate analysts are estimating the impact of the pandemic in the industry, the fear and uncertainty is now overpriced in the company valuation. Analysts are simply avoiding the stock because they don’t believe in the industry. That combined with a market cap of “only” 1 Billion USD resulted in the stock not being covered by analysts on banks. As an example, UBS stopped the coverage for the company some months after the pandemic started.
That’s the reason why the current valuation is so deviated of the intrinsic value of the company. One simple fact that can prove that is a simply math calculation. According to “Clear Channel Outdoor investor relations website” and to data certified in reports with the “SEC”, Clear Channel owns 510,000 print and digital displays across the globe. 15’000 of these are digital displays in international markets (screens), as well as 1’900 digital displays (screens) + 1’400 digital billboards (rolling; physical billboard) in the United States (excluding airports). Knowing that the company total current assets, as of Q3, amount $1.14 Billion and total liabilities respectively $8.6 Billion, that results on $7.46 Billion needed to pay debt. Additionally, the current market capitalization of the whole company in the stock market is only $1.17 Billion.
With this data, we can take the deficit we got from the total debt less current assets, which was $7.46 Billion and divide it into the total amount of billboards (no matter their category; digital, display, etc.), which is 510,000. (18,700 digital) The result will be the average price of one single advertising panel of Clear Channel. If we run that calculation, the result comes at $14,628 for each panel. Now we could ask ourselves, is this a high or low price. In my opinion and seeing the number at first sight, it is terribly low. You should know Clear Channel has a ton of panels at Times Square and at almost every single train station in Europe and the UK.
Content from Times Square Panels provided by Clear Channel:
A picture I took from Clear Channel panels in Switzerland. I have seen them with adds of supermarket brands, chips brands equivalent to Lay’s from Pepsico or even Nespresso itself:
After seeing the quality of these panels and how full they are, I really doubt they are worth only $14,628. If it was like that, I would like to buy one for my own and generate passive income for the rest of my life.
However, clearly me feeling that price is low doesn’t prove the company is undervalued. It’s just the sentiment that made me research this company in the first place, but it’s not enough to generate a conclusion. What can we do to prove the company is in fact undervalued? Easy, let’s do the same calculation for the most direct competitors. We will use, Outfront Media and Lamar Advertising Company.
Outfront Media
Market Capitalization: $3.4 Billion
current assets: $0.782 Billion
Total debt: $4.46 Billion
Amount of panels: 500,000
Lamar Advertising Company
Market Capitalization:$11,110,000,000
current assets: $348,200,000
Total debt: $4,483,693,000
Amount of panels: 338,000
Clear Channel Outdoor
Market Capitalization: $1,257,000,000
current assets: $1,140,851,000 Billion
Total debt: $8,608,533,000 Billion
Amount of panels: 500,000
With this data, we will try to figure out the following:
1. How much is the average price of a single advertising panel of each of these companies.
This will be done with the following calculation. ( Market Cap. of the company + total liabilities - current assets ) / amount of panels owned.
2. annual revenue per panel.
This will be done dividing annual revenue of the company by the total amount of panels owned. The calculation will be made using 2019 annual revenue, 2020 annual revenue and Q2 2021 multiplied by four as a forecasted 2021 annual revenue.
3. Price per panel adjusted to cco's revenue.
This calculation will answer the following question. How much would the average price per panel be for each company if each panel made the exact amount of revenue as the average cco panel.
For example, the average Outfront Media (OUT) panel makes 2711$ in revenue compared to 4248$ for each cco panel. Meanwhile, the average price per panel of cco's panels is 17,449$ and for OUT 14,117$. Because the revenue per panel is different, the price per panel is also different and not comparable. However, we can fix this adjusting all revenues to cco's revenue and increasing the price per panel by the same percentage. For example, if OUT revenue per panel is in this case only 64% of cco's revenue per panel, we assume the price per panel is also only 64% of the price per panel of cco. Then we can calculate the adjusted price per panel, following 2021 forecasted annual revenue, to then compare prices per pannel of each company and see if CCO's current price per panel is high or low compared to its peers.
The results for the annual revenue per panel of each company in 2019, 2020 and (Q2 2021 x 4) are shown in the graph below.
With these results and with the average price per panel, we can then calculate the average price per panel adjusted to cco's revenue for each company. The revenue used will be the 2021 (4x Q2) because it is the most recent result and reflects better the current intrinsic value of each panel.
As seen in the results, CCO's adjusted price per panel, is the lowest in the industry. Even considering 150k of the panels LAMR has, are in reality only small logo displays that significantly lower the resulting overall price per panel. In comparison, CCO's panels are all either transit displays or big size billboards. Moreover, CCO is a dominant player in the billboard market in Times Square, whereas LAMR doesn't even own displays in Times Square.
If we consider that Outfront Media is being valued properly by the stock market, then CCO's market cap. should be 26.4% higher. I personally think Outfront Media is significantly undervalued, but not as much as CCO.
On the other hand, if we consider that the market is valuing LAMR correctly, then CCO's market cap. should rise 108.5%. I personally think LAMR is the most known outdoor advertising company and the one analysts research the most. I think it is trading at a high price that is already pricing full economic recovery from the covid 19 pandemic. It is a great point of comparison if we only expect Clear Channel to recover 2019 revenue and profitability levels, but not if we think there is more room for growth.
Exactly that is what I expect. I think that nowadays the time people spend looking at smartphones and digital advertising has peaked. I don't expect it decline forever from now on, but i think digital advertising is bound for a correction as the economy reopens.
I think also that a new long term trend has started. People realize watching our phones 24/7 is no good for our health or our professional future. People will try to become more productive, read more (digital or physical books) and avoid spending a day watching social media. As this happens, people in the train, subway or in the street will try to not look at their cellphones. Because in reality, it makes no sense. It sometimes feels like we live to watch our phones and that is not true. I think people will realize that eventually and try to decrease the time they spend on phones. Not entirely, because that seems impossible right now, but that time will in my opinion decrease significantly.
The consequences are clear for digital advertising. Google's Youtube will suffer first and advertisers will seek new alternatives.
In fact, yesterday (Sept. 21) CCO's management had a presentation at a Goldman Sachs conference. In that time Scott Wells, America Clear Channel Outdoor’s CEO stated the following. - “Advertisers feel overexposed to digital advertising”
To me, this confirms the start of this new trend that will replace the one experienced from 2011 - 2019, where digital advertising did nothing more than grow. CCO is apparently already benefiting from customers seeking new ways to highlight, like they always have. The only thing is, digital is now the usual. A new alternative has to be found, and now a comeback to outdoor advertising seems a solution for more efficient advertising. Meanwhile the stock market is pricing CCO as a dead company, since "Digital is the future". Right? 100% digital is the future right? The company will be dead because... Wait, the only moment when CCO will be dead is if humans stop having eyes, or using them. What just happened during the pandemic because everyone was at home using their cellphone. I think thus far it's clear that CCO is a reopening play. Even more, possibly one of the best ones along with restaurants. Even better and way more probable than the Cinema comeback leaded by AMC.
Take also into account that the main problem with CCO is their debt. If inflation rises, their debt is easier to pay, the company will be able to increase prices, but expenses will remain the same. Advertising has tiny operating expenses. In addition, because the market cap is only 1 Billion thanks to the debt factor that everyone is also considering (Everyone considers market cap as 8 Billion, 1B market cap + 7B debt). That means that if any expectations change, huge volatility can be expected because the only thing that will be variable in that equation will be the market cap, which affects share pice. Debt is fixed.
In that same Goldman Sachs conference, the CFO also said something very interesting.
"There is nothing magical about the year 2019" - Brian Coleman, Clear Channel CFO.
It is reasonable to expect a comeback to 2019 revenue profile. However, 2019 is no magical benchmark. It's used for pre-pandemic comparison, but CCO currently has the opportunity to go past those profitability levels. Not only inflation is helping to expect more revenue in the coming years.
Technological advances are helping CCO's profitability too. I know it sounds ridiculous, but it's true. It's something I would like to cover more in detail in another dedicated article.
For example, Clear Channel is now buying data from partners that use gps localization of people that pass near CCO's advertising panels and identifies if they buy anything related to the advertisement in a nearby store in the coming days. This service is called Radar Suite and partners include companies like Foursquare to compile data from the target audience. Basically, CCO is trying to catch up to the efficiency and feedback on return on investment that digital advertising offers. This service is already being offered to customers, it has many of them and the data compiled from data partners gets updated every week on the platform.
This is only a fraction of the results of all the investments CCO has made in tech development and implementation in the past years. It is also the reason why profitability has been so low in the past years. There's a ton of spending related to this development and the improvement of old physical billboards and panels into new digital displays. Which by the way, in CCO's case already amount to 20,000.
The only thing that’s needed to change the way the market values the company, is a slight change in the interest on the overall outdoor advertising industry. We expect this will happen very soon, led by a change in the generally accepted forecast of long term impact of the covid-19 pandemic in the industry and the recognition of the industry as a reopening play. Right now, the company isn't covered by big banks. However, the interest shown by Goldman Sachs with their requested conference is showing this may be finally starting to change. If big banks start coverage, we can expect very different valuations...
Therefore, we are more than long on Clear Channel and think it's the best way (most undervalued company) to profit from this upcoming trend.
We did announce our price target in advance of this article because the stock was trading at crazy prices. It was a gift.
Price Target (3 Years) : 20$
Coverage of the stock since: 2.3$
Current Price: 2.55$
Evolution of CCO's price and our target price since coverage began:
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