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Outfront Media (OUT) Focuses on Digital Screens, CapEx A Woe

Outfront Media’s OUT organic growth strategies—mainly its emphasis on digital screens and transits, are likely to bolster its performance. However, elevated capital expenditures related to these strategies remain a concern.

Also in second-quarter 2017, the company recorded 2.9% growth in organic revenues. Its adjusted FFO per share came in at 56 cents, beating the Zacks Consensus Estimate by a cent. The figure, however, came in lower than the year-ago quarter tally of 63 cents.

Results reflected an encouraging growth in local billboards and transit display segment, partly offset by the softness in the national advertising market, specifically in the automotive category. The Canadian and Sports Marketing segment also witnessed impressive progress.

Outfront’s strategy to expand its operations in Boston and other operating markets is encouraging. Recently, the company had undertaken a strategic buyout and asset swap to expand its digital display portfolio. This helped the company to acquire digital billboards in the Boston designated market area (DMA), Toronto, Montreal, Calgary, Edmonton and Vancouver. It also shed its static display assets in non-metro areas of Wisconsin, Missouri, Illinois, Tennessee and South Carolina.

Acquisitions aside, the company is also making constant efforts to convert its static displays to digital screens, install new digital billboards across its markets and invest in ON Smart digital displays. These initiatives are anticipated to boost its performance and fuel growth over the long term.

However, Outfront’s expenses have continued to escalate year over year, with the trend continuing in the first six months of 2017. The company incurred operating expenses of $213.3 million, an increase of 5.8% year over year. Maintenance capital expenditure of $7.5 million also flared up a whopping 74.4% year over year. This trend, amid the company’s expense-control initiatives, is expected to thwart the bottom-line growth. Management projects a $5-million escalation in capital expenditure.

Also, Outfront’s performance in the second quarter bore the brunt of the weakness in the national advertising market. Particularly, the automotive and telecom category were adversely affected. This sluggish environment is likely to stretch in the third quarter as well, limiting revenue growth for the company.

The stock has lost 11.1% year to date, underperforming 2.2% growth recorded by the industry it belongs to. The company’s Zacks Consensus Estimate for the current year has been revised nearly 1.5% downward, over the last 30 days. The stock currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

A few better-ranked stocks in the REIT space include Liberty Property Trust LPT, PS Business Parks, Inc. PSB and Park Hotels & Resorts Inc. PK. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Liberty Property Trust and PS Business Parks have expected long-term growth rates of 6% and 5%, respectively. Park Hotels & Resorts has expected long-term growth rate of 4.7%.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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