Novice Investing - Do not Advertise Lamar

Date: Sunday 20th 2008f July 2008 12:41:35 PM

Do not Advertise Lamar - 07/30/2006

By: Novice Investing Staff

Lamar Advertising Co. (LAMR) provides outdoor advertising service in the United States and Canada. We will dug deeper into its business by analyzing Lamar's 2005 annual report. The company operates three types of outdoor advertising displays, mainly: Billboards, Logo signs and Transit display. The company operates in small to medium sized markets with local advertising contributes to 82% overall revenue.

Lamar operates 151,000 billboard displays which can be broken further into 73,000 bulletins and 78,000 posters. Bulletins are large, illuminated advertising display on the major highways. Meanwhile, posters are smaller advertising displays located on major traffic arteries and city streets. In recent years, Lamar has introduced digital billboards where contents can be refreshed every 7-10 seconds. However, at to this point, the company only operates 31 digital billboards.

There are 98,000 logo advertising display being operated by Lamar. It started this segment in 1988 and has since seen an outsized demand from it. Basically, the company erects logo signs which advertises on nearby gas station, food, camping places, lodging and others. Lamar's other business is transit advertising where the company provides advertising display in bus, bench and bus shelters.

Meanwhile, Lamar has a diverse revenue streams with a single advertiser accounting for no more than 2 % of total revenue. It is also diverse against various industry sectors with restaurants providing the most revenue contribution of 11%. As a whole, Lamar's business is highly seasonal, peaking in the summer and the fall. Winter season will be the slowest time of the year as advertisers ease off from heavy promotional campaigns for the fall holiday season. This year, there is no reason to think that this trend will change.

So far, business looks good. Lamar operates in a small to medium sized markets where business is a little harder to duplicate. With 82% of total revenue coming from local advertising, Lamar has bonded an unduplicable relationship with local community. Furthermore, it has a diverse revenue stream that makes it more stable than other advertising companies.

Now, onwards to the ugly side of Lamar. Balance sheet is highly leveraged with $ 1.576 Billion of long-term debt and only 19.4 Million of cash equivalents. Annual interest expense run at $ 90.6 Million. Therefore, if Lamar is to report several bad quarters, there is a high chance that it cannot pay its own interest expense. The company also has several restrictions on its debt covenants, mainly that it has to maintain total debt to EBIDTA ratio of less than 6 and EBIDTA to interest expense ratio of greater than 2.25. For the year 2005, EBIDTA (earning before interest depreciation taxes and amortization) comes in at $ 456.89 Million while total debt comes in at $ 1.92 Billion. To avoid violating its debt covenant, Lamar EBIDTA needs to be above $ 320 Million. That is only $ 136 Million less than current EBIDTA.

Furthermore, Lamar has a total depreciable long term asset (property, plant & equipment, goodwill and intangible asset) of $ 3.481 Billion while depreciation cost runs at $ 287 Million in 2005. That implies a total of 12 years total depreciation. While Lamar is not in the high technology business where things can change quickly in three four years, 12 years is not a conservative depreciation estimate.

To make matters worse, in recent years, advertising has quickly switched online where contextual advertising (instead of traditional cost per impression advertising) is becoming more common. To solidify this phenomenon, Lamar too, has managed to grow revenue only through acquisitions instead of organic growth. As time progresses, we feel that digital billboard advertising is more effective compared with old-style billboard advertising. Unfortunately, Lamar only has 31 digital billboards currently or 0.02% of total billboard displays. For the current year (2006), Lamar is expected to post $ 0.50 of net profit, which gives it a forward price earning ratio of 96. This does not take into account the high level of leverage that Lamar incurs. If you own Lamar, it is best to sell this stock right away.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Lamar Advertising Co. (LAMR) or any other securities.

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