Follow the Signs
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The next time you take a road trip, pay attention to the billboards. Don’t just look at the actual billboard, where you might find a cow telling you to eat more chicken, look at the bottom of the billboard. You might see the name Lamar, which stands for Lamar Advertising (NASDAQ: LAMR).
The good news
In addition to digital, transit, and special product advertising, Lamar is a big player in the billboard advertising market. These billboards can be found on highways, expressways, and primary arteries.
What many people might not know is that billboard advertising is arguably the best form of advertising in existence. The cost-per-thousand-impressions is the best an advertiser will find anywhere, which means demand is likely to remain high over the long haul.
Advertisers like billboards for other reasons as well. One of those reasons is that the ad can’t be closed, like a window on a computer. Also, according to Lamar Advertising, 71% of road travelers notice out-of-home ads, and out-of-home ads reach 96% of Americans each week.
Another big selling point is that approximately 33% of social media is now viewed on a mobile device, which is in thanks to the increased popularity of smartphones and tablets. This means consumers are more likely to spot a billboard ad and share it with friends while on the road. (Hopefully, they’re not the ones driving.)
Those interested in fashion and cars are the most likely to share a billboard ad. In regards to age, the 18-24 demographic is mostly likely to tweet an out-of-home ad. The point here is that billboards have the potential to reach various types of consumers. Therefore, advertisers are likely to desire billboard ads through Lamar Advertising.
The bad news
Lamar Advertising aims to become a REIT, but the IRS stated that this process has been delayed because it wants to look further into qualification measures.
The Wall Street Journal describes a REIT adeptly: “REITs don't pay corporate income taxes on the taxable income they distribute to shareholders as a dividend, and they must pay out at least 90% of taxable income to qualify. Because of those hefty payments, REITs are popular with individual investors seeking higher yielding securities.”
Lamar Advertising’s company culture also leaves a lot to be desired, and some anonymous employee comments are concerning.
According to Glassdoor.com, employees have rated their employer a 2.5 of 5, and only 24% of employees would recommend the company to a friend. One of the biggest complaints is the commission rate, which seems to be around 1.2% to 2%. Other complaints include salespeople being spread too thin due to cuts in other areas, unqualified managers, and the company’s poor reputation throughout the industry.
Lamar vs. peers
Lamar’s revenue has improved over the past two years after two years of declines. Lamar has also seen two years of earnings improvements after two years of losses. However, with a profit margin just north of 2% and a trailing P/E of 46, there isn’t much margin for error. Lamar also owns a debt-to-equity ratio of 2.45, which is well above the industry average of 0.8. This could impede growth potential, especially if the economy weakens.
Clear Channel Outdoor (NYSE: CCO) saw revenue decline in 2012, it has reported losses in four of the last five years, and it has also been in the red in three of the last four quarters. According to an anonymous employee reporting on Glassdoor.com, its restructuring plan has been ineffective thus far.
Clear Channel’s profit margin of -7.25% is worrisome, but its debt-to-equity ratio of 14.41 is even more concerning. To make matters worse, Clear Channel is trading at 750 times earnings, making it one of the most expensive stocks throughout the broader market. With financials this bad, it’s surprising that the short position on Clear Channel Outdoor is only 4%.
Omnicom Group (NYSE: OMC) might not be a direct competitor, but it’s a much larger company that owns advertising firms of various sizes. This leads to consistently strong market share. Therefore, it should come as no surprise that Omnicom has consistently improved revenue and earnings annually. It even delivered big profits in 2008 and 2009 when the economy was reeling. The stock didn’t hold up well at the time, but it was much more resilient than Lamar and Clear Channel.
Omnicom’s company culture is strong, with employees rating their employer a 3.4 of 5. Additionally, 64% of employees would recommend the company to a friend. According to anonymous employee reviews, Omnicom maintains a strong reputation throughout the advertising industry, and it’s client base is well diversified.
Omnicom sports a profit margin of 7%, it owns a debt-to-equity ratio of 1.09, and it’s trading at just 15 times earnings. Therefore, it’s stronger than Lamar Advertising and Clear Channel Outdoor in every area. Furthermore, Omnicom yields 2.40%, whereas Lamar nor Clear Channel are able to pay a dividend. Amazingly, Omnicom has the highest short position of the three.
Lamar Advertising has a sustainable business plan, and the company should be around for a long time. Revenue and earnings have improved slightly over the past two years, but the company culture is weak, and insider opinions of a company should never be underestimated. Additionally, the IRS has delayed the company's REIT conversion request.
Clear Channel Outdoor is clearly not a better option. Omnicom looks to be the best long-term investment of the three thanks to industry reputation, strong fundamentals, and consistent growth.
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