Lamar Advertising: Solid Fundamentals Are Increasingly In The Price (Rating Downgrade)

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Lamar shares have performed well, given solid business results and declining bond yields.LAMR's focus on local advertising and ongoing conversion to digital billboards are sources of strength, though ...

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I last covered Lamar in May, reiterating shares as a \"buy,\" and since then, the stock has returned 16% vs the market's 10% gain. I had seen 10% upside for shares, and with the stock having achieved that, now is a good time to determine if investors should begin taking profits. Seeking Alpha In the company's second quarter, Lamar earned $1.34 in GAAP EPS, which was actually $0.03 below consensus. However, it said that it is pacing toward the high end of its $7.75-$7.90 FFO guidance. In the quarter, Lamar generated $2.08 in adjusted funds from operations, up 9.5% from last year. The billboard business has proven to be fairly stable, as it is not exposed to cord-cutting like cable or the loss of subscriptions like print advertising, which has made this an attractive long-term business. Reliance on local advertising has helped results Additionally, the billboard business is more exposed to local advertisers than national ones. For instance, we have all seen local restaurants and gas stations highlighting how close they are to a highway exit via billboard. In fact, local is 79% of Lamar's customer base. This advertising spending tends to be a bit less cyclically sensitive than national accounts, which has been a positive for LAMR this year. Management noted that national customers are soft while local has been strong, which has been a consistent trend. Still, it expects mid-single digit growth in the second half even with national a drag. Overall, revenue grew by 4.5% while EBITDA rose by 7% to $272 million last quarter, and we should see a similar, if not slightly higher pace in Q3 and Q4. I would note that bolt-on acquisitions added 0.6% to revenue and EBITDA. I have been impressed by Lamar's ability to grow EBITDA faster than revenue, even in a mixed advertising environment. This has been driven by the company's strong cost discipline. Indeed, EBITDA margins expanded 100bps from last year to 48%. Even with revenue higher, G&A expenses were down by $4 million to $84 million as it tightly controls corporate costs. Beyond this, given the muted environment, LAMR has pulled back on discretionary expansion activity. It completed $23 million of cap-ex, down from $51 million last year. About $13.6 million of this was for maintenance work. For the full year, it is doing $125 million of full year cap-ex, including $50 million of maintenance work. Digital conversion remains a tailwind Much of this growth spending continues to be focused on converting static, traditional billboards into digital ones. Indeed, about 70% of billboard cap-ex is being dedicated to digital, rather than traditional, units. Digital boards tend to drive substantially more revenue, as they flip advertisers every 10-15 seconds. This also tends to make them more attractive to national advertisers as part of programmatic campaigns. Whereas as traditional billboards run for weeks, digital campaigns can start and end quickly, making them more attractive for a product launch, for instance. Aided by this programmatic campaign activity, same-store digital sales were up 2.6% year over year, consistent with recent trends. Lamar now has 4,842 digital units, up 83 so far this year. Given this growth, we have seen Lamar pass a critical benchmark, with digital now over 30% of revenue. I expect this share to continue to grow and reach about 50% over the next five years. Given strong operating results and moderating cap-ex, Lamar generated $203 million of free cash flow, up 28% from last year. Accordingly, in August, Lamar raised its dividend by 8% to $1.40, giving shares a forward 4.2% yield. On top of this, I see the possibility of a roughly $0.50 special dividend before year-end to ensure it pays out 100% of taxable income to shareholders. As such, investors are likely to realize a dividend yield closer to 4.5% in my estimation. Politics and Helene Largely Offset In the near term, we should also see some benefits from the political calendar. Unlike broadcast television, billboards are not a primary beneficiary of political advertising spending. Still, there is some benefit. Entering Q3, Lamar had a $15 million booking for political advertisements. Given past trends, this should mean that spending ends up in the $20-25 million area. This is about a $0.18 benefit to FFO, or just over 2%. Partially offsetting this, damage from Hurricane Helene could be a modest headwind to results. The Southeast has been Lamar's strongest region, with California a bit softer. Given the devastation Helene has sent from Florida through the Carolinas, many local businesses may face some pressure, and that could reduce advertising demand somewhat. This headwind is moderated by the fact more rural areas of the Carolinas faced the worst impact vs. the Charlotte area. Still, it is a potential 1-3% headwind to results, essentially offsetting the political benefits. Interest rates matter more to valuation than operating results Importantly, Lamar continues to have an excellent balance sheet, with $3.3 billion of debt for 3x debt to EBITDA. This is a moderate amount of leverage. Given its stable debt load and long-term maturities, even with elevated rates, interest expense was essentially flat at $44 million from last year. While they don't have a significant direct impact on Lamar's financials, I continue to view rates as a critical consideration for investors. Long-term rates are important in discounting future real estate cash flows. Additionally, higher rates provide competition for dividend stocks. Over the past year, long-term rates (as proxied by the 10-year treasury) have been declining, relieving some pressure on valuation. Seeking Alpha It has been noteworthy that treasury yields actually rose after the Federal Reserve's 50bp rate cut, with the 10-year increasing 5bps to 3.71% since the day of the cut. This is a reminder that long-term yields discount anticipated rate actions. Already a meaningful rate cycle towards 3% over the next 12-18 months is reflected in bond yields. Accordingly, we may not see long-term rates decline much further even as the Fed cuts, absent a significant deterioration in the economic outlook. Valuation is less compelling As such, I believe over the past four or five months, we have seen the vast majority of the benefit from lower rates in Lamar's share price. With a 6% FFO yield, Lamar is now more fully reflecting its fundamental growth. Assuming about 2% price inflation, a 1% annual benefit from traditional to digital conversions, and 0-1% billboard count growth, LAMR can generate 3-4% sustained growth, for about a 9-10% long-term return potential.  I use a 10% return as my threshold for a \"buy,\" and so LAMR is at the cusp of a buy or a hold. Given its strong run and the prospect long-term yields may not fall much further, I believe much of the rally has occurred and would not rush to buy or add shares here. That said, its dividend is secure and will be a source of moderate income growth over time. Accordingly, I am moving shares to a hold. If the stock pulled back towards $125, I would view LAMR as a buy again. LAMR is a solid hold, but most of the upside has occurred.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"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":"4.29.1","shortVersion":"4.29.1","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/2472630079"}