Friday, August 19, 2022

Lamar Advertising Company

Lamar Advertising Company (LAMR) is one of the largest outdoor advertising companies in the United States based on number of displays (possibly the largest), and rents space for advertising on billboards, buses, shelters, benches, logo plates, and in airport terminals. They offer a fully integrated service, from ad copy production to placement and maintenance. They operate three types of outdoor advertising displays:

  • Billboards: 153,800 billboard advertising displays in 45 states and Canada, comprised of two types, bulletins and posters. Bulletins are large, illuminated advertising structures that are located on major highways and target vehicular traffic. Posters are smaller advertising structures that are located on major traffic arteries and city streets and target vehicular and pedestrian traffic. There are 3,900 digital billboard advertising displays.
  • Logo signs are located near highway exits, advertising nearby gas, food, camping, lodging and other attractions. They are the largest provider of logo signs in the United States, operating 23 of the 26 privatized state logo sign contracts. They have 137,800 logo sign advertising displays in 23 states and the province of Ontario, Canada.
  • Transit advertising displays. They rent advertising space on the exterior and interior of public transportation vehicles, in airport terminals, and on transit shelters and benches in over 80 markets. They have 46,600 transit advertising displays in 23 states and Canada.

They operate in these three segments, but 90% of their revenue is derived from billboards, with 65% from static billboards. The average billboard (static and digital) grossed $10,491 during 2021.

The market capitalization at $102.50 per share is $10.4 billion and the enterprise value is $13.7 billion. During the second quarter of 2022 (results), the company generated free cash flow of about $200 million, so the free cash flow yield on the enterprise value (FCF/EV) annualizes to about 5.8%. Revenue for the quarter was $518 million, giving a free cash flow conversion of 39%, in line with our cigarette-type businesses. (The current dividend yield is 4.6%. As a REIT, Lamar is required to distribute 90% of earnings to shareholders).

Take a look at Lamar's results for 2021 compared with 2015. Lamar was able to grow revenue per billboard by 4.1% compounded, and total revenue by 4.7% compounded, while spending only around 8% of revenues on capital expenditures. (Compared with around 20% of total revenue being returned to shareholders through dividends.) The result (thanks to operating leverage) is that cash from operations grew at 7.4% and free cash flow grew at 8.8% compounded.

Lamar mentions some competitive factors in the annual report:

Outdoor advertising is subject to governmental regulation at the federal, state and local levels. Regulations generally restrict the size, spacing, lighting and other aspects of advertising structures and pose a significant barrier to entry and expansion in many markets.

We own over 9,800 parcels of property beneath our advertising displays. As of December 31, 2021, we leased over 69,900 outdoor sites, accounting for an annualized lease expense of approximately $291.8 million. This amount represented approximately 18% of billboard advertising net revenues for that period. These leases are for varying terms ranging from month-to-month to a term of over ten years, and many provide us with renewal options. Our lease agreements generally permit us to use the land for the construction, repair and relocation of outdoor advertising displays, including all rights necessary to access and maintain the site. Approximately 74% of our leases will expire or be subject to renewal in the next 5 years, 17% will expire or be subject to renewal in 6 to 10 years and 9% thereafter. 

One of Lamar's bigger customers (no individual customer represents more than 2% of revenue) is Cracker Barrel Old Country Store. (We have all seen the highway signs for these restaurants.) Cracker Barrel earns a 4% net profit margin. 

Comments from the second quarter conference call:

"We were able to push pricing in Q2 with rates up high single-digits versus Q2 2021, both on analog posters and on bulletins."

"We expect as we move through the second half of the year, revenue growth to normalize to 3% to 5% and expense growth to normalize to 2% to 3%. Categories of particular strength in Q2 included education, retail and service, as well as amusement, entertainment and sports, which continues its recovery. In fact, all of our top-10 categories, including automotive, were up on a year-over-year basis in Q2. Political, while not a top-10 category, is also very strong right now, particularly on digital."

"Political is pacing up 82%, '22 over 2020, and about 50% of that spend ends up on our digital platform. Candidates really appreciate the flexibility to respond in real time that digital provides. By the way, digital revenue for us will top $500 million this year. And as I've said before, we are aggressively building out our network so that number will continue to grow."

Lamar is not super-cheap like our Canadian oil investments, but it is a high quality, niche real estate investment. (Our pipelines are also real estate investments, with impenetrable barriers to entry.) Most of the world's businesses are crappy. They have to advertise to remind people that they exist. It would not be too surprising if Cracker Barrel's percentage of sales spent on marketing is higher than its ultimate profit margin. Lamar is a beneficiary of that.

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