Lamar Advertising Company

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Lamar Advertising Company is one of the largest outdoor advertising companies in the United States, operating billboards, transit and airport advertising, and digital sign displays, with a significant portion of its revenue coming from local and regional advertisers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Lamar Advertising (LAMR) is primarily involved in the sale of advertising space on outdoor display structures, including:

  • Billboards: Traditional static billboards which form a majority of their revenue.
  • Logo signs: Signs which feature business logos on the side of the road and at exit ramps.
  • Transit: Advertising space on public transportation including buses, trains, and airports.
  • Digital displays: Includes digital displays on billboards and in airports.

In addition to traditional out-of-home (OOH) advertising, Lamar is also increasing their investment into digital advertising, mostly billboards and to a smaller extent in airports. They focus on local and regional advertisers.

  • Digital Transition: The advertising industry is seeing a significant transition towards digital and programmatic advertising. Although billboard advertising is still the core revenue source for Lamar, the digital ad space is growing faster.
  • Fragmented Market: The outdoor advertising market remains fragmented, but there are a few companies that dominate this space. Consolidation is increasing, and it’s likely that a few companies will gain disproportionate market share.
  • Technological improvements: The technologies used to produce and display advertisements are increasingly digital, resulting in lower production costs, more flexibility, and the increased ability to display real-time and dynamic advertisements.

Competitive Landscape

The outdoor advertising market is competitive, with a mix of large national players, regional players, and smaller independent operators. Lamar competes with:

  • Other OOH Advertising Companies: Such as Outfront Media, Clear Channel Outdoor, and smaller local operators.
  • Digital Media: Google, Meta and other digital companies also compete with OOH for advertiser’s money. The digital ad market is quickly taking away revenues from OOH
  • Traditional Media: Such as radio, newspapers, and tv. Traditional media revenue share is rapidly decreasing, and it does not create the same competitive pressure on OOH as digital advertising.
  • Alternative Advertising Formats: Direct Mail, newspapers, radio. These are low-cost, readily available and thus the biggest competitors.

The key differentiators for Lamar are its extensive network across the United States and its ability to offer diverse forms of outdoor advertising solutions. The strength of local relationships, the amount of capital invested in advertising assets, and expertise in dealing with legal, regulatory, and permitting hurdles also create a strong competitive advantage.

Financial Analysis

Lamar’s financial performance for the nine months ended September 30, 2023 shows:

  • Revenue Growth: Revenues for the nine months of 2023 totalled $1.6 billion, a 3.7% increase from the previous year. Total operating revenues of $1.68 billion for the year.
    • Billboard advertising makes up 86% of revenue, transit at 5%, and logo signs at 5%. Other makes up the remaining 4%
  • Operating Income: $408.9 million
  • Net Income: $219.6 million

  • Adjusted EBITDA: $671.4 million

    • A strong emphasis is on local and regional advertisements
    • Lamar continues to increase their investment in digital displays, and they made $11.1 million in their revenue on digital signs.
    • They have strong margins from their business, showing strong profitability in this space.
    • In previous calls, management has indicated that acquisitions are primarily the driver of revenue growth, which has been the case again in the last nine months period
  • Cash flow: Operating cash flow for the nine months ended September 30, 2023 totalled $495.3, versus $460 million in the previous year.

Analyzing the latest 10-Q (Form 10-Q Quarterly Report for period ending Sept 30, 2023) for LAMR, we can see:

  • “The increase in net revenue is primarily attributable to an increase in billboard net revenues of $34.1 million and an increase in transit net revenues of $1.2 million over the same period in 2022. “
  • “For the three months ended September 30, 2023 and 2022, total operating income was $79.6 million and $78.4 million, respectively, and total net income was $43.9 million and $45.1 million, respectively.”

  • “The increase in operating expenses is mainly from increases in direct operating expenses (exclusive of depreciation and amortization) and selling, general, and administrative expenses.”

  • In relation to their financial leverage: “Our operating leases have a weighted average remaining lease term of 12.4 years. The weighted average lease term as a percentage of operating liabilities is 6.1%. “

  • “The Company has established a target net debt-to-EBITDA ratio between 4 and 5. This level of leverage enables a favorable credit rating and allows access to capital markets at reasonable rates. Our leverage as a % of enterprise value is 31.4%”

  • The company has a $1.15 Billion net debt * They are trying to reduce the high leverage they accumulated through acquisitions.
  • For guidance they gave the following
    • “We now expect an AFFO range of $7.05 to $7.20 per share, an increase of $0.075 at the midpoint ended up $0.135. From that guidance, we will achieve $1.58 per share in the fourth quarter.”

Based on these recent reports, we can see a stable, profitable company that is growing revenue steadily, although they seem to be struggling with increasing costs and high levels of debt.

Moat Assessment: 3 / 5

Lamar has a moat due to several factors, which provides a barrier for potential competitors.

  • Scale and Coverage: Lamar has a broad geographical presence, which provides a strong barrier to entry. The sheer size of the network, especially when combined with local market knowledge and relationships, makes it more difficult for smaller firms to compete. * Real Estate Investment Trust: Lamar is a REIT, it provides a steady revenue stream that other competitors may not have access to.
  • Location Advantages: In OOH, location is everything. The value of the location increases dramatically as the area becomes more popular. Having premier locations with large volumes of traffic allows LAMR to charge higher rates to advertisers.
  • Proprietary Infrastructure: Having a well-established physical infrastructure, consisting of many well placed billboards and digital displays, is very difficult to replicate.

However, their moat is not as wide or durable as other, more successful businesses.

  • Intangible assets: Despite their size, they do not have any strong brand and have low switching costs, meaning a competitor can easily entice a customer away from LAMR’s advertising.
  • Competitive Intensity: The industry is highly competitive, and new players and technologies might erode LAMR’s competitive advantage if they are slow to adapt to the changing environment

  • Low Barriers to Entry: The barriers to entry into the overall OOH industry are relatively low, specifically for digital signage. Since most digital displays are now commodity products, it’s difficult to obtain a sustainable competitive advantage through their products alone, giving competitors an edge if they can create better pricing for their clients.

  • This rating is also given on the fact that only the strongest companies will continue to perform well through market and industry volatility.

Given this assessment, Lamar’s moat is classified as “Narrow”. Though they have some barriers to entry, these may not be enough to protect their long term profit stream from competitors.

Risks to Moat & Business Resilience

  • Technological Disruption: The rapid advancements in digital and online advertising could pose a significant threat to Lamar’s traditional outdoor advertising business, resulting in reduced profitability.

Lamar needs to constantly evolve with the technology and market environment in order to be competitive.

  • Economic Sensitivity: The OOH advertising market is highly susceptible to fluctuations in the economy. Recessions may significantly reduce advertising budgets of clients, resulting in a decrease in profits for LAMR.
    • Recent earnings calls indicate that their revenue growth is coming from acquisitions, and not their own organic growth.
  • Intense Competition: The fragmented nature of OOH industry brings stiff competition. As an effect, market share and revenue growth can be taken from LAMR very quickly if other competitors start to grow their assets at a higher rate.
  • High Debt Load: High debt obligations and interest payments can hinder their performance and their ability to allocate capital to better their business.
    • They have an ambitious goal of 4-5% net debt to EBITDA, if they fail to achieve that it can be a negative factor for the valuation of LAMR.
  • Regulation: Changes in zoning and permitting laws by municipalities could restrict the company’s ability to erect new advertising structures, further impairing their growth.

Understandability: 2 / 5

Lamar’s business is quite difficult to understand for the following reasons:

  • Complex Accounting: The company is a REIT, which presents some unusual balance sheet and income items. Additionally, the need to adjust financial statements for lease accounting and the effect of amortization of goodwill further complicates the numbers.
  • Industry Specifics: The advertising industry, especially OOH advertising, contains complexities and unique methods of data reporting that are not commonplace in other industries.
  • Capital Structure: It can be hard to understand and analyze their debt, and how their high debt affects the financials of the company.
  • Acquisitions Driven Growth Though acquisitions create value for LAMR’s future, it also makes analyzing their financials complicated and requires a good deal of pro forma adjustments.

Balance Sheet Health: 4 / 5

Lamar’s balance sheet is considered relatively healthy for the following reasons:

  • Assets and Equity: The company has significant assets in the form of billboards and displays, and has a large equity base.
  • Good Debt Coverage: Though the company’s debt is large, its current EBIT to interest expense ratio is 11.7x, indicating a good ability to cover their debt expenses. They are committed to bringing their long term debt-to-EBITDA ratio down to 4.0 to 5.0x.
  • Stability: Their debt maturity dates are staggered, which provides some stability over the years.
  • Future Debt Reduction: They have a consistent history of paying down their debt. As their assets increase and so does their ability to generate high revenues, they should continue to pay down debt and reduce their leverage.

While their debt levels are a cause of concern, they are profitable and have historically shown strong cash flow. This reduces risks of problems regarding debt.

Conclusion

Lamar Advertising Company operates in a competitive industry that presents some inherent challenges, particularly for the long term. The company generates strong operating performance, but it needs to focus on its sustainability to ensure it is successful in the long term. Although Lamar has a somewhat durable moat, the strength of their moat is still not fully proven yet, so any investor needs to constantly analyze them to ensure that the moat still holds. The company is trying to streamline its acquisitions, and improve the efficiency in the usage of its capital and business. Their balance sheet is also fine, given their current debt structure, but needs further improvement. The company would become more of an attractive investment if it can reduce its high debt.

This is not financial advice. Please do your own research.