In the dynamic world of investment, the alignment of a new portfolio addition with immediate positive performance is a rare and welcome occurrence, one that Jeffrey Bronchick and the team at Cove Street Capital (CSC) recently celebrated with the inclusion of Outfront Media (Ticker: OUT) in their Small Cap Value Fund. The Q4 2023 shareholder letter sheds light on this strategic move, highlighting Outfront Media’s position within the competitive landscape of billboard companies and its intrinsic qualities that make it an attractive investment.
Outfront Media stands out as one of the “Big 3” in the billboard industry in the United States, primarily operating as a Real Estate Investment Trust (REIT). This sector, when managed effectively, is known for its high returns on tangible capital, owing to the limited and highly sought-after nature of billboard real estate. The transition from traditional to digital billboards has further enhanced the sector’s profitability, promising greater free cash flow and a secular uptick in profitability.
However, the journey to realizing this potential has not been without its challenges. Bronchick points out a series of “unfunny” events that led to a significant decline in Outfront Media’s stock price, from the mid-$20s to approximately $10, which served as Cove Street’s entry point. These challenges included a general slowdown in advertising, exacerbated by specific downturns in the auto sector and the impacts of industry strikes, alongside the persistent shadow of Covid-19. Moreover, with a significant portion of its revenue stemming from public transportation venues, Outfront Media faced additional headwinds as the return to office work in major cities remained sluggish.
Despite these obstacles, Cove Street’s research suggested that the majority of these issues were cyclical rather than permanent, presenting a unique opportunity for Outfront Media to rebound. The company’s strategic maneuvers, such as the potential sale of its Canadian business at a multiple nearly double that of the entire company’s trading multiple, underscored the latent value within Outfront Media and its avenues for balance sheet improvement.
Bronchick’s analysis posited that, in a normalized environment, the stock was trading at roughly half of Cove Street’s estimated value for the company, signaling a significant undervaluation. This assessment, coupled with the early positive contribution of Outfront Media to the CSC portfolio, underscores the potential for savvy investors to capitalize on market dislocations and cyclical downturns.
Outfront Media’s inclusion in Cove Street Capital’s portfolio not only reflects a strategic bet on the recovery and growth of the billboard advertising sector but also highlights the broader investment philosophy of identifying and seizing value in overlooked or temporarily distressed assets. As Outfront navigates the path to recovery amidst a challenging advertising landscape, its journey offers valuable insights into the interplay between cyclical challenges and intrinsic value, serving as a beacon for investors willing to look beyond short-term headwinds in pursuit of long-term gains.
DISCLAIMER: None of this is financial advice. This article was written based on information contained in a shareholder letter. None of the details have been verified. This article is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
