Loaded up on OSI:
here the link to the CBS takeover rumor:
8
Playing Pac-Man in Billboards
By Paul R. La Monica
OUTDOOR SYSTEMS
IT'S NOT EASY being a mid-cap stock these days. Even the ones with terrific earnings growth are being indiscriminately punished. Take the case of Outdoor Systems (OSI), the country's biggest billboard operator. This Phoenix-based firm, which went public in 1996, increased earnings by 50% last year (or 33% before acquisitions). And over the next three years, the company is expected to increase its earnings at a 38% rate. Yet the stock, which has a $3.12 billion market cap, has fallen 39.5% from its June high of 28, making it an attractive bet in the eyes of some analysts.
Outdoor Systems has been able to achieve its tremendous growth through acquisitions. Indeed, that's about the only way to grow in the billboard business. Why? Tough zoning rules have actually reduced the total number of billboards in the U.S. by 1% from 1985 to 1996. Meanwhile, Outdoor Systems has grown from 80 billboards when it was founded in 1980 to 60,000 billboards today. Over the past three years, the company has made more than 200 acquisitions including the 1996 purchase of Gannett Company's (GCI) outdoor division for $700 million and this year's purchase of two Mexican outdoor-advertising businesses for $238 million. Other operators have been doing the same thing. Now, the top four billboard operators control 35% to 40% of the $2.1 billion U.S. market.
But there is still room for further consolidation. And Outdoor Systems plans to continue buying its competitors, in spite of the drop in its stock price, which makes equity-financed acquisitions more expensive. The company, which has a 34% debt-to-capital ratio, could also borrow to make new purchases.
But even without new acquisitions, Outdoor Systems should be able to increase its after-tax cash flow at a 15% rate, says Frank Bodenchak, a Wall Street Journal All-Star analyst with Morgan Stanley Dean Witter. (Outdoor, like most radio and television companies, is valued by analysts on reported cash flow as opposed to earnings. These companies are generally more leveraged than most firms and have large depreciation and amortization charges that suppress earnings.) According to Bodenchak, Outdoor will benefit from rising ad rates and new technology, like computer-printed images on vinyl, which is driving prices down.
The increase in ad rates has surprised many investors, who feared the worst when Congress passed a law regulating how close cigarette billboards could be to schools. But, it turns out the decrease in tobacco advertising was good for the industry. Why? "Tobacco had a lot of clout because of its size so they always got the best locations and best prices," says William Meyers, an analyst with BancBoston Robertson Stephens. Once freed of the low-price, long-term contracts with cigarette makers, billboard operators have been able to lease their spaces at higher prices. After rising at a 2.6% rate over the past decade, the average billboard ad price climbed 4% last year. This year, analysts expect a 3% increase.
Meanwhile, new advertisers are coming to the medium. Ford Motor (F), for instance, signed a 2 1/2 year $45 million contract with Outdoor Systems in July. These new advertisers are attracted by the low cost of billboard advertising. For instance, it costs $3.50 to reach 1,000 consumers via a highway billboard. The average cost to reach 1,000 people through a 60-second radio spot is $5.30 and $18.00 for a 30-second television commercial during prime time. Thanks to the Ford contract and additional spending by consumer product and entertainment companies, Bodenchak expects Outdoor Systems' same-store revenues (sales from billboards that were part of the company last year) to increase 10% in the third quarter and to continue to grow in the 9% to 10% range, barring a major economic downturn.
Of course, that's the wild card. If we do sink into a recession, companies will surely cut their advertising spending. During the last recession in 1992, billboard advertising revenues fell 4%. But a slowdown is already built into the price of Outdoor's stock, which, at 18 times estimated 1999 cash flow, trades at a discount to its expected growth rate.
Even if there is a recession, the consolidation of billboard operators is likely to continue. And there's even a chance that Outdoor will be bought. In fact, the CBS (CBS) network, which is spinning off its Infinity Broadcasting radio division, has already been mentioned as a possible suitor for Outdoor. Then there are the equally acquisitive Chancellor Media (AMFM) and Clear Channel Communications (CCU).
Would Outdoor agree to be purchased? Perhaps. Its 66-year-old founder and chairman William Levine, who holds 21% of the company stock, will surely want to retire someday. But for now, it looks like Outdoor is more interested in being the buyer than being bought itself. Which means we can expect double-digit growth for a few years to come.
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