Clear Channel Outdoor has been on fire lately. In the past six months alone, the company’s stock price has rocketed 84.3%, reaching $2.12 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Clear Channel Outdoor, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Clear Channel Outdoor Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Clear Channel Outdoor. Here are three reasons you should be careful with CCO and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Clear Channel Outdoor’s demand was weak and its revenue declined by 5.3% per year. This was below our standards 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 6.4%, meaning it lit $6.42 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Clear Channel Outdoor’s $6.46 billion of debt exceeds the $155 million of cash on its balance sheet. Furthermore, its 13× net-debt-to-EBITDA ratio (based on its EBITDA of $485.1 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 isn’t a terrible business, but it doesn’t pass our bar. Following the recent surge, the stock trades at 14.3× forward EV-to-EBITDA (or $2.12 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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