The past six months have been a windfall for Clear Channel Outdoor’s shareholders. The company’s stock price has jumped 75.4%, hitting $2.39 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Clear Channel Outdoor, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Clear Channel Outdoor Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Clear Channel Outdoor for now. Here are three reasons there are better opportunities than CCO and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Clear Channel Outdoor’s demand was weak and its revenue declined by 2.9% per year. This wasn’t a great result and signals it’s a lower quality business.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While Clear Channel Outdoor posted positive free cash flow this quarter, the broader story hasn’t been so clean. Clear Channel Outdoor’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.5%, meaning it lit $5.54 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Clear Channel Outdoor’s $6.47 billion of debt exceeds the $190 million of cash on its balance sheet. Furthermore, its 12× net-debt-to-EBITDA ratio (based on its EBITDA of $504.8 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Clear Channel Outdoor could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Clear Channel Outdoor can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Clear Channel Outdoor’s business quality ultimately falls short of our standards. Following the recent surge, the stock trades at 14× forward EV-to-EBITDA (or $2.39 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.
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