Lamar Advertising: A Solid Q1 With Dividend Hikes Likely To Come

seekingalpha05-06

Lamar Advertising has generated moderate performance, gaining 13% in the past year and offering a secure 4% dividend.Q1 results showed revenue growth of 5.7% and adjusted funds from operations rose by...

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09:04 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4689667-lamar-advertising-stock-solid-q1-with-dividend-hikes-likely-to-come><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Lamar Advertising has generated moderate performance, gaining 13% in the past year and offering a secure 4% dividend.Q1 results showed revenue growth of 5.7% and adjusted funds from operations rose by...</p>\n\n<a href=\"https://seekingalpha.com/article/4689667-lamar-advertising-stock-solid-q1-with-dividend-hikes-likely-to-come\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4558","symbol_name":"双十一","start_time":0,"source_url":"https://seekingalpha.com/article/4689667-lamar-advertising-stock-solid-q1-with-dividend-hikes-likely-to-come","article_id":"2433713465","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/200465990/image_200465990.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2433713465","pubTimestamp":1714957488,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Lamar Advertising has generated moderate performance, gaining 13% in the past year and offering a secure 4% dividend.Q1 results showed revenue growth of 5.7% and adjusted funds from operations rose 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Ascent/PKS Media Inc./DigitalVision via Getty Images Shares of Lamar Advertising (NASDAQ:LAMR) have been a moderate performer over the past year, gaining about 13% while also paying a secure 4% dividend. The company continues to benefit from a recovery in travel and associated advertising. I last covered Lamar in December, rating shares a buy, given my belief it was well positioned for ongoing dividend growth. Since then, shares have rallied by 8%, in-line with the S&P 500’s return. Q1 results were encouraging and consistent with my expectations for the year. Seeking Alpha In the company’s first quarter, Lamar grew revenue by 5.7% to $498 million, as EPS rose modestly to $0.76 from $0.74. Adjusted EBITDA of $212 million, was up by 7.1% aided by 50bps of margin expansion, and adjusted funds from operations (AFFO) rose by 9.2% to $1.54. Higher interest rates have caused net income to rise more slowly than EBITDA with interest expense of $44.5 million, up from $41.4 million last year. Given rates have likely peaked and LAMR will be repaying debt, YoY interest expense comparisons should become more favorable as the year progress. While interest expense will not fall as quickly as I first hoped, I believe we will see sequential declines. Given the 6% revenue growth environment, LAMR showed solid cost discipline. Direct advertising expenses rose by 4.7% while SG&A rose by under 3%. Much of this expense growth was driven by normalization in its business, leading to increased growth in airport spending after COVID-related concessions. Billboard expenses were down 0.7% from last year. Given the ongoing travel recovery, airports were the standout with revenue up 20% from last year, though the core of the business is in billboard. I was encouraged to see digital same-store sales are up 2.7%, and digital is now 29% of revenue. This segment was down 1.8% on a same-store basis last year, so this is a meaningful tick up. LAMR generates more revenue per digital billboard because it can rotate advertisements throughout the day, vs traditional billboards that will stay statics for several weeks or even months. That is why LAMR is allocating a disproportionate share of its capital budget to digitalization. In Q1, it spent $29 million on cap-ex; $7 million went to traditional billboards and $13 million in digital. This spending is consistent with its $125 million target but is below the $42 million invested last year, as it focuses on optimizing its footprint and further reducing debt. Growth in advertising rates and occupancy was primarily driven by strong local sales, with restaurants and amusement services the two standouts. Conversely, insurance, which has faced squeezed profitability given higher claims, has been a weak spot. Overall, local revenue was up 6.7% and programmatic was up 27%. By comparison, national accounts were down 5.5% as large companies in particular have been cautious about the macro environment. Management expects a further decline in Q2, though likely at a slower rate than in Q1. Importantly, unlike television, national brands are not the key driver of Lamar’s business. Often when driving on an interstate, you will \\ see billboards for restaurants and gas stations near an upcoming exit, local law firms, or other nearby attractions; you generally do not see ads from national consumer product brands like Procter & Gamble’s (PG) Tide. This anecdotal experience is consistent with the data. Local and regional advertisers account for 82% of billboard revenue. Because of its local focus, Lamar has a very diverse customer base, as its top 10 customers are just 5% of the business. That reduces any key customer risk. A strong national ad market is obviously better for Lamar than a weak one, but all else equal, strength in local advertising is much more important for the company. Additionally, with local newspapers dying out and more consumers cutting the cord, billboards are one of the few remaining ways for local businesses to ensure they can advertise in front of an audience. This is why I view the billboard business as a durable one. Importantly, we continue to see an ongoing recovery in people out and about, driving more. All else equal, it also seems more employers are bringing people back into the office vs turning remote, which should increase commuting, time on the road, and the attractiveness of billboard advertising. St. Louis Federal Reserve Given these trends, management said that 2024 is pacing stronger than last year. One additional tailwind is that 2024 is an election year, which provides the added benefit of political spending to all advertising companies. While Lamar will not benefit as much from this trend as local broadcasters, in all likelihood, it will still be a tailwind. In Q1, LAMR earned $3.8 million in political revenue, up a bit vs 2022 and $3 million more than last year. We should see this continue to increase into Q3 and for the year it can provide a 1-2% boost to revenue. Additionally, Lamar has a strong balance sheet, which will help it manage through a higher for longer rate environment. It carries $3.4 billion of debt. As a result, it has 3.1x debt-to-EBITDA leverage. With retained cash flow, it aims to pay down much of its $350 million 2025 term loan this year. That should push leverage below 3x this year, which is well below its 3.5-4x target. Running below-target leverage when interest rates are particularly high makes sense, and if we eventually do see a rate decline, this would give LAMR significant capacity to borrow when it is more attractive to do M&A or accelerate organic growth. This is a management team with a conservative approach to the business, an approach that should add value over the medium term. That makes it more notable to me that given the strength in Q1, Lamar raised AFFO guidance to $7.75-7.90 or about $800 million. I would note that in AFFO, Lamar includes its maintenance cap-ex needs, which are $50 million. As such, its FFO in comparison to other REITS is $850 million. Now, in December, I targeted $870 in FFO. About $10 million of this gap is driven by the fact that it seemed several months ago the Federal Reserve would cut rates by about 4 times this year. LAMR assumes no cuts, and 0-2 cuts appear most likely to me, so the company will face more interest expense than previously assumed. Adjusting for this, guidance is about $10 million below my prior forecast, which I attribute to management’s conservatism. Given the strength of trends in Q1, I expect further raises to guidance this year, barring a surprise recession and continue to believe about $860-870 million in FFO or $815 million after maintenance cap-ex is a reasonable forecast. Currently, Lamar pays a 1.30 dividend, which costs about 540 million per year. That leaves nearly $200 million in retained cash flow after dividends and cap-ex, which will go to debt reduction. Additionally, management on the call said an August dividend hike is likely, and the company will “perhaps also pay a special dividend at year end.” LAMR will likely have worked through all of its net operating losses by the end of this year and will then distribute 100% of taxable income. I expect a total dividend of closer to $6-6.40 between an increase this summer and potential special payout for an all-in yield of ~5.2%. Of course, all investments have risks. For Lamar, there are several. On the macro side, advertising spending is cyclical, as it is a discretionary expense businesses can cut when demand falls. As such, if we see an economic downturn, revenue and utilization can come under pressure. Lamar's diverse, local-oriented business does help manage this risk, but this risk still exists. I do not view a recession as likely, though it is a risk to monitor. Billboard advertising also faces less obsolescence risk than cable TV or print, given it cannot be as readily replaced by online advertising. Given Lamar's lower debt load vs its target and history, its financials do not have meaningful interest rate risk. However, I do believe its stock's valuation will move with rates. Higher interest rates create more competition for dividend stocks and lead to higher discount rates used on future cash flows. Put simply, a 5% dividend yield is much more attractive when the 10-year treasury yields 2.5% than 4.5%. As such, if long-term interest rates move higher, to north of 5%, that may lead to multiple compression for LAMR, even if its business is unimpacted. I do not view this as Lamar-specific risk, but rather a risk for most dividend and income-oriented stocks, including most REITs and utilities. While I do not expect a sharp decline in rates, further Fed funds rate hikes also appear unlikely to me, making me comfortable with this risk. If the 10-year treasury does move to 5%, there likely would be a better entry point for LAMR and shares could pull back to $105-110. Lamar's primary peer is OUTFRONT Media (OUT). That stock trades 9x forward FFO, whereas Lamar trades 13.3x based on my estimates. That seems like a large premium. However, OUT carries much more debt, $2.8 billion, or about 1.2x its market cap. By comparison, LAMR's $3.4 billion of debt is about 0.3x its market cap. OUT has an EV/FFO of ~20x vs ~17.3x for LAMR. I view this as an attractive discount for LAMR, given its much healthier balance sheet. With rates staying higher for longer, less debt is a positive, and it means LAMR's financials are less vulnerable to downturns. OUT also has material NYC subway risk, which is viewed unfavorably. I view LAMR as a stronger entity at a cheaper enterprise valuation, which can provide ~10% upside for shares.  The billboard business may not be the most exciting, but it is a durable form of advertising. Increasing digitization provides ongoing revenue tailwinds, and the diversity of LAMR’s account base provides lower volatility in results. It also has a conservative balance sheet, giving it ample M&A capacity should a deal prove attractive in the future when rates are lower. Shares have a 7.2% FFO yield, which I view as attractive for a company that should grow 3-5% given modest billboard growth and advertising price inflation. This should enable ongoing mid-single digit dividend hikes and special payouts to meet REIT tax requirements. A 7% FFO yield and 3-5% growth provides the potential for long-term low double-digit returns, making Lamar a compelling buy for income-oriented investors.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2433713465"}