What's Ailing Channel Outdoor Holdings?

By Eric Fox | October 14, 2008 AAA

Clear Channel Outdoor Holdings (NYSE:CCO) hit a high of around $30 in early 2007 and has since dropped by 80% due to forecasts of plummeting advertising spending and a high debt load.. Bargain hunters beware- this decline is not a buying opportunity.

Background
Clear Channel Outdoor Holdings should not be confused with Clear Channel Communications. Clear Channel Outdoor Holdings is an outdoor display advertising company that operated or owned (in late last year) about 897,000 displays globally, including billboards, transit, street furniture and mall locations. The company went public in November 2005, when Clear Channel Communications, sold 10% of its holdings in an initial public offering. A private equity group led by Bain Capital Partners, LLC and Thomas H. Lee Partners, L.P has since acquired Clear Channel Communications. Investors can still own Clear Channel Communications through a publicly traded entity formed by the private equity groups called CC Media Holdings (OTC: CCMO.PK) (Interested in digging into the topic of private equity? Then check out Private Equity Opens Up For The Little Investor.)

Trouble From All Sides
So, what ails Clear Channel Outdoor? Let's begin with the downgrades. On October 7, an analyst at Goldman Sachs cut his forecast for advertising spending through next year. Later in the week, Laura Martin an analyst for Soleil, downgraded Clear Channel Outdoor to 'hold' from 'buy', and cut the price target for the stock to $10 from $25. She cited weak pricing power and said that ad demand had softened recently, leading to cancellations for the upcoming quarter. The analyst cited price cuts of 25-40% by competitors of Clear Channel Outdoor. (To learn more, read Analyst Forecasts Spell Disaster For Some Stocks.)

Investors should have seen a hint of this slowdown two months ago. Although Clear Channel Outdoor beat expectations and showed growth in revenue and earnings when it reported in August, the company said that it saw a slowdown starting in the United Kingdom and its European segment.

Aside from the macro problems facing all industry players, some of Clear Channel Outdoor's problems are self-inflicted. The company had about $2.6 billion in debt, or $2.2 billion in net debt if you subtract out cash and money owed to it. Most of this debt is owed to Clear Channel Communications, its parent and majority owner. It's possible that the market is assuming a worst-case scenario that would mean a restructuring and significant dilution of equity holders.

Industry Hurting
Lamar Advertising
(Nasdaq:LAMR), a competitor of Clear Channel, is also experiencing a slowdown in business. In August 2008, Lamar reported results that met analyst expectations, but lowered guidance for the next quarter, based on slower growth.

Suppliers to the outdoor advertising companies may also be hurt in this environment. LSI Industries (Nasdaq:LYTS) is a supplier of digital billboards to Clear Channel Outdoor and may see a drop in business if the company cuts back on orders.

Bottom Line
The stock of Clear Channel Outdoor Holdings has fallen about 80% but may not be attractive due to weak advertising spending forecasts and a fairly large debt load. Investors may be best served by keeping their bargain hunting instincts in check.

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