Lamar Advertising Company (NASDAQ: LAMR) is an outdoor advertising company operating billboards, logo signs, and transit displays in the U.S., Canada, and Puerto Rico. Having ridden the wave of consolidation in the outdoor industry to become the number three player in the U.S. industry--85% of domestic outdoor revenues are already in the hands of the top three companies--Lamar is running out of attractive acquisition targets and may have to focus on organic growth or international expansion.
The recent innovation of digital signs is set to help make the outdoor industry more competitive with other forms of advertising such as newspaper, radio, and Internet by slashing operating costs and allowing for much faster display changes and demographic targeting.
As of December 31, 2009, Lamar owned and operated approximately 150,000 billboard advertising displays in 44 states, Canada and Puerto Rico, over 100,000 logo advertising displays in 21 states and the province of Ontario, Canada, and operated over 27,000 transit advertising displays in 16 states, Canada and Puerto Rico.
Second Quarter 2010 Results
Lamar reported net revenues of $286.4 million for the second quarter of 2010 versus $274.7 million for the second quarter of 2009, a 4.2% increase. Operating income for the second quarter of 2010 was $49.3 million as compared to $34.0 million for the same period in 2009. The Company also recorded an expense of $17.1 million related to the loss on early extinguishment of debt resulting from the refinancing of its senior credit facility and the repurchase of all outstanding 7 1/4% Senior Subordinated Notes due 2013, of which $12.3 million is a non-cash charge attributable to the write off of unamortized debt issuance fees. The 7 1/4% Notes were repurchased pursuant to a tender offer and subsequent redemption, both of which were funded by proceeds from the issuance in April 2010 of $400 million 7 7/8% Senior Subordinated Notes due 2018. There was a net loss of $8.9 million for the second quarter of 2010 compared to a net loss of $11.8 million for the second quarter of 2009.
Lamar Advertising sells its advertising space on two types of billboards: bulletins and posters. Bulletins are large, advertising structures (the common size is 14 feet high by 48 feet wide, or 672 square feet) consisting of panels on which advertising copy is displayed. The Company wrap advertising copy printed with computer-generated graphics on a single sheet of vinyl around the structure. Lamar Advertising sells selected bulletin space to advertisers for the duration of the contract (usually one to twelve months). It also sell bulletins as part of a rotary plan under which it rotates the advertising copy from one bulletin location to another within a particular market at stated intervals (usually every sixty to ninety days) to achieve greater reach within that market. At December 31, 2009, the Company operated 68,000 bulletins.
Posters are smaller advertising structures (the common size is 11 feet high by 23 feet wide, or 250 square feet). It also operates junior posters, which are five feet high by 11 feet wide, or 55 square feet. Poster panels utilize a single flexible sheet of polyethylene material that inserts into the face of the panel. Posters are concentrated on major traffic arteries and target vehicular traffic, and junior posters are concentrated on city streets and target hard-to-reach pedestrian traffic and nearby residents. At December 31, 2009, Lamar Advertising operated 80,800 posters.
In addition to the traditional displays, Lamar Advertising also sells digital billboards. Digital billboards are electronic light emitting diode (LED) displays (the common sizes are 14 feet high by 40 feet wide, or 560 square feet; ten and a half feet high by 36 feet wide, or 378 square feet; and 10 feet high by 21 feet wide, or 210 square feet), which are located on traffic arteries and city streets. Digital billboards are capable of generating over one billion colors and vary in brightness based on ambient conditions. They display completely digital advertising copy from various advertisers in a slide show fashion, rotating each advertisement approximately every 6 to 8 seconds. At December 31, 2009, the Company operated approximately 1,150 digital billboards in various markets.
The Company sells advertising space on logo signs located near highway exits. It operates 21 of the 27 privatized state logo contracts. It erects logo signs, which generally advertise nearby gas, food, camping, lodging and other attractions, and directional signs, which direct vehicle traffic to nearby services and tourist attractions, near highway exits. The Company also operate the tourist oriented directional signing (TODS) programs for the states of Nevada, Colorado, Nebraska, Missouri, Michigan, Ohio, Kansas, Kentucky, Virginia, Louisiana and New Jersey, and the province of Ontario, Canada. As of December 31, 2009, Lamar Advertising operated over 33,000 logo sign structures containing over 100,000 logo advertising displays in the United States and Canada.
Lamar Advertising provides transit advertising displays on bus shelters, benches and buses in 63 transit markets. It provides a range of creative and installation services to the transit advertising customers. As of December 31, 2009, the Company operated over 27,000 transit advertising displays in 16 states, Canada and Puerto Rico.
The domestic outdoor advertising industry is highly consolidated, with a few large companies operating in multiple markets and the rest operating a limited number of displays in a handful of markets.
The top three players--Clear Channel Outdoor , CBS (through its CBS Outdoor division), and Lamar Advertising--together take in over 85% of industry revenues. The Highway Beautification Act of 1965 limits the number of new billboards that can be built, making market entry difficult and giving current players pricing power. The growth of profit margins among the top players reflects the returns to scale in the outdoor industry because of consolidation. However, while there is little room left for further consolidation or organic growth in the constrained market, the rollout of digital signs may continue to increase operation efficiencies.
Lamar is the number three player overall and the number one pure-play outdoor advertiser. Because Lamar focuses on small and mid-sized markets and competes less in large markets, the company derives about 90% of its revenue from markets where it has at least an 80% share of the outdoor advertising market.
Lamar has produced consistently higher profit margins than its top competitor, Clear Channel Outdoor (CCO). Lamar does not report its revenues by geographic source or by product source as CCO does. However, since the company generates all of its revenues from the Americas--most of which comes from the U.S.--it can be assumed that Lamar's overall margins are far below CCO's Americas segment operating margins. This may be due to a different product mix (billboard margins are the highest of all), increased expenditures on new digital signs and contract renewals costs, Lamar's focus on smaller markets, and the cost advantages of CCO's greater scale.
In addition to industry competitors, outdoor advertisers compete for advertiser dollars against other media such as television, radio, the Internet, and newspapers. According to the Outdoor Advertising Association of America, outdoor advertising revenues in the United States increased 7% per year over the past decade. While the domestic supply of billboards cannot increase significantly in the near future barring an unlikely easing of regulations, there may be room for growth as outdoor grabs advertising expenditure market share from other forms of media. As a basis of comparison, outdoor advertising has only about a 2% share of total domestic advertising revenues, significantly lower than in many other countries. Outdoor comprises 12% of total advertising spending in France, 10% in the UK, and 8% in Spain.
One trend that would benefit all outdoor advertising companies is the potential increase in prices for this channel:
Recently introduced digital signs have the potential to make big waves in the outdoor advertising industry. LED and LCD digital displays allow for higher quality, faster time to market, and better customer targeting. They also promise to significantly cut costs. While digital outdoor advertising typically requires a higher initial investment for the displays, digital displays will cut industry operating expenses by allowing outdoor advertising companies to update displays at the click of a button rather than through the standard labor-intensive on-site visits. Messages can also be more targeted; for instance, ads can be changed at different times of the day (a practice common in television called "day-parting") as well as instantaneously updated for price changes. These innovations have the potential for advertising companies to maximize advertising slots and hence, sales revenue.
The ability to update ad displays quickly and frequently may herald a transition from a business model based on selling display space to one based on selling time on multiple displays. It also has the potential to attract different types of advertisers to outdoor advertising as well as to increase display utilization rates.
Lamar generates much of its revenues from billboards placed along the highway, and ad rates for these billboards are determined by the amount of traffic that passes by them. Increasing traffic volume and drive times are Lamar's key growth drivers. Thanks to urban sprawl, the search for cheaper housing outside of major metropolitan areas, and America's love of cars, commuters are spending more time in their cars than ever before.
Lamar's main source of revenue, advertising, is highly correlated with and sensitive to GDP growth and decline. Small downturns in the economic performance lead to disproportionately large overall declines in ad spending, while ad spending tends to increase sharply during boom times. In particular, 9% of LAMR's revenues from from real estate advertisers, which makes the company vulnerable to slowdowns in the U.S. Housing Market.
In addition, revenues in the outdoor advertising industry are highly seasonal, following consumer spending trends. Lamar typically has its strongest performance in 3Q and 4Q, with its weakest performance in the first quarter, partly because retailer advertising is cut back after the holiday shopping season.
Customers seeking to get the highest return on investment in advertising want measures of the relative "impact" of their ads and make decisions about where to place their money based on metrics that help determine the cost per thousand impressions (or CPMs). Currently, advertisers buy outdoor display space based on traffic counts provided by the Traffic Audit Bureau, which measure gross exposure to a particular display but do not measure active viewing; thus this metric serves as only a rough measure of actual outdoor displays' advertising impact on their audience. This kind of impact measurement is similar to newspapers and television stations, which counts gross circulation or viewer numbers. Internet advertising, on the other hand, has the ability to yield superior measurement detail provided by audience metrics such as click-through rates, impressions, conversions and other metrics.
A new system being rolled out that would provide advertisers with a more accurate measure of impact has the potential to attract more advertisers and more money from existing advertisers. The Traffic Audit Bureau, which measures traffic circulation, will begin providing not only demographic data but also "eyes-on" data that would allow advertisers to know who is actually viewing their ads. This greater amount of detail may make outdoor advertising more competitive vis-a-vis traditional media and bring it closer to the measurement provided by the Internet.
The outdoor advertising industry owes its profits in good measure to the 1965 Highway Beautification Act, regulates the locations of outdoor displays in the U.S. Limitations of billboard placement to major U.S. highways and industrial areas has created large barriers for new entrants into the highly consolidated market, leading to high profit margins (unlike Europe, where it is less regulated). On the other hand, four states--Vermont, Alaska, Hawaii, and Maine--have banned billboards altogether.
U.S. federal, state and local regulations play an important role in shaping the outdoor advertising industry, and any changes could make a significant financial impact on Lamar. Digital billboards may be regulated in the future because of their brightness or power to distract highway drivers. In addition, several jurisdictions in and outside of the U.S. have imposed taxes on gross receipts of outdoor advertising revenues, and new jurisdictions may also seek to do so.