Friday, November 3, 2023

Lamar Advertising Company - Q3 2023 Earnings ($LAMR)

[Previously: Lamar Advertising Company - Q1 2023 Earnings and Lamar Advertising Company (August 2022).]

One of the things that initially attracted us to Lamar Advertising Company (LAMR) was its high free cash flow margins - the signature feature of a "royalty-like" business.

The market capitalization of Lamar at $95 per share is $9.7 billion and the enterprise value is $14 billion. During the third quarter of 2023 (release, 10-Q), the company reported free cash flow of $181 million, which was up 2.9% from the prior year quarter. This quarter's free cash flow yield on the enterprise value (FCF/EV) annualizes to 5.2%.

Revenue for the quarter was $543 million, which was up 2.9% from the prior year. Notice the very healthy free cash flow margin of 33%. The quarterly dividend of $1.25 per common share was a total of $128 million returned to shareholders, a 5.3% dividend yield. (As a REIT, Lamar is required to distribute 90% of earnings to shareholders.)

So far this year-to-date, using $529 million of cash generated from operations as well as additional borrowings of $90 million, the company has reinvested $246 million in acquisitions and capital expenditures and paid $383 million in distributions to shareholders. Notice too that cash from operations is almost equal to revenue.

Let's compare Lamar's results for the first nine months of 2023 compared with 2018 (five years ago). Their shares outstanding have grown only 3% in five years, revenue has grown 30% (exactly equal to PPI inflation), and cash from operations has grown 43% - better than inflation.

So, cash from operations per share went from $3.73 to $5.19, an increase of 39%. Obviously, CFO is different than free cash flow because it ignores both maintenance and growth capital expenditures, but by using CFO we normalize for the different levels of growth expenditures over time.

Lamar is not as cheap as Natural Resource Partners, but it is a "royalty-like" business with a healthy free cash flow margin and strong cash generation. As we have observed in the past, most of the world's businesses are crappy. They have to advertise to remind people that they exist. Even McDonald's franchisees have to hire Lamar for this, essentially paying them a royalty on their business.

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