Description
I'm recommending LAMR as a buy.
Investors loved Lamar at $60/share range a few years ago and are at best indifferent today with equity shares trading at less than $30. Slower than anticipated digital board rollout, slower than expected local ad revenue recovery, and questions surrounding disruptive technologies contribute to the sentiment.
Lamar equity shares provide opportunity to invest in a high-margin, maintenance capex-lite, cash-generating business with notable barriers to entry. (for the prior, very nicely-timed write-up on Lamar, here is duff234's report on VIC dated 12/2008:
http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/3620.) Recognizably, there is some hair as the company has a levered balance sheet with debt/EBITDA of 5x and family ownership which gives the Reilly family control on a voting basis.
LAMR equity shares are relatively cheap if nothing improves in their space and absolutely cheap assuming further success in rolling out digital billboards. Recently, it's share price has fallen from around $40/share to less than $30/share, which represents a haircut of 2.5x ttm EBITDA. At current $28 price tag, LAMR sports a market cap of $2.6b and EV of $4.9b. The company trades at 10.5x ttm EBITDA and ttm free cash flow (CFO less total capex) yield on market cap is 10%. CapEx over the trailing period were $55mm and although mgmt has noted that 2011 would be around $100mm with $50mm for static maintenance and $50mm for digital rollout. LAMR paid down $120mm of its term loan balance in Q1 and mgmt has also publicly committted to deleveraging the balance sheet by using free cash flow to pay down various term loans (totalling $750mm at end of Q1 2011) and eventually other debt. Throughout the past 10 years, only during this past recession has Lamar traded below 12.5x. Its EBITDA multiple troughed in 2002 at 12.5x and fell to 6.5x during this past recession, of which Lamar remained FCF positive throughout as a result of capex reductions and opex discipline. In 2009, revenue fell 12% YoY but EBITDA margins only compressed by 100 bps. Of course, in cyclical industries multiples may deceivingly compress at the peak and expand at troughs, but historically such has not been the case for LAMR.
EBITDA peaked at over $500mm annually in 2007 and 2008 and stands at about $470mm today on a trailing basis as of Q1.
Lamar and Industry Summary
Lamar is the 2nd largest owner/operator of billboards in the U.S. and is the only publicly-traded pure play U.S. Billboard company. Peers include CBS Outdoors which represents <15% of CBS consolidated revenues, and Clear Channel Outdoors (CCO), which is 89% economically owned by Clear Channel, who also has 99% of the voting rights, and a $2.5b intercompany recievable and payable add even more hair to the CCO story. Also, CCO's revenues are roughly 50/50 between North America and International - Europe and many other regions do not have the same restrictions on billboards that has created non-conforming status in the U.S.
As of YE 2010, LAMR owned and operated 147,000 billboards in the U.S., including approximately 1,200 digital boards. The company also has logo signs (located near highways which advertise nearby gas, food, lodging, etc) and transit advertising displays.
About 80% of revenues are from static billboards, and that 80% is split about 70/30 between bulletin (large structures typically measuring 14 feet by 48 feet, located along highways usually) revenues and posters (typically 11 feet by 23 feet or even smaller in some cases, located along more local roadways). Accordingly, revenues per board are much higher for bulletins at $1,095/month vs poster rates of $415/month.
Digital revenues represent 12% of total revenues. As of May 4th, per mgmt's comments on their call, the company had 1,244 digital boards split 52% bulletin (the larger boards) and 48% as posters. The company has only slightly favored rolling out digital as bulletins vs the smaller posters. Specifically, since Q1 2010, the company has increased digital bulletins by 10% vs posters by 6%. Nonetheless, it's still roughly 50/50 and mgmt has indicated the rollout would continue in that fashion.
The remaining 9% of revenues are from transit and logo signs.
Top-line is of course cyclical and directly tied to advertising spend, and particularly local advertising spend. Revenue simply equals Rate Per Board x Occupancy Rate. However, the billboard business has de minimis maintenance CapEx and similarly, very little real depreciation of bulletin and poster assets. Most importantly, ~45% of Lamar's boards enjoy grandfathering status in non-conforming areas, permanently preventing new board supply in those areas. Additionally, organic growth exists through its digital rollout which empirically produces 4-6x revenue per board vs static billboards and 70% vs 40% EBITDA margins for static... the unit economics of swapping out a static board for a digital board are very compelling.
Lamar's billboard business is relatively simple: The company owns the physical structure, often leases the land on which it sits (although little by little buying out underlying "dirt", as mgmt puts it), and sells advertising space on its boards for various time periods (1 month to 12 months for static boards, and from several days to a month for digital which changes displays several times per minute and consists of 6-8 displays at any point in time). It terms of it's "dirt" ownership, Lamar owns 6,800 sites on which its structures sit, and leases 77,000. Some structures have 2 or even 3 faces (hence the property sites don't add up to billboard sites on a 1-for-1 basis). The company typically owns land in more favorable and expensive locations, so property ownership percentage understates true value here a bit, but I can't be sure by how much - just know that historically, LAMR has selected more favorable locations to purchase when available. About 80% of Lamar's revenues are from local advertising vs 20% from national accounts. As a result, Lamar emphasizes customer service and operates in a decentralized fashion by giving local managers flexibility, and incentives to maintain and grow their region.
As a quick primer, although top line revenues are cyclical and directly tied to advertising spending, I think the U.S. billboard business is attractive, as summarized by the following:
- high-margins unit margins (~45% EBITDA margins per static board)
- little or no maintenance CapEx, as static billboards suffer little real physical depreciation (other than storm/weather related). Given one-time investment required to build a static board, depreciation overstates maintenance capex requirements.
- regulatory permits in general are often difficult to acquire, which limits organic growth for incumbants but also keeps new supply in check and thus is supportive of billboard rates
- non-conforming status in many locations prevents new billboards - many billboards in the U.S. are in locations that have since banned such structures, however, in many cases existing boards were grandfathered (for Lamar, about half of their boards are in non-conforming areas)
- the argument can be made that it's not only better/easier/cheaper to enter the industry through acquisition of an incumbent or its underlying assets, but for some locations it's the only possible way to enter the industry.
The economics are even more favorable with the evolution of digital billboards:
- 4-6x the revenue per board as static
- 70% EBITDA margins (driven by higher revenues and also lower opex - no need to send a truck and personnel out to change display periodically)
- result is about 7-8x EBITDA as the board in replaces!
- slightly lower startup costs as LED technology gets cheaper and cheaper (similar to flat panel tv's in general) - digital rates are priced relative to static as an advertising medium, not a cost-plus service relative to underlying technology costs, so there's a naturally increasing spread here, albeit only little by little.
- useful life is estimated at 10 years but could of course be less in hindsight.
estimated unit economics of digital rollout:
The unit economics of digital billboards are very accretive. Lamar selects favorable locations of its existing static billboards, so unfortunately there's some cannibalization upfront and particulalry of their higher-rate static board locations. Not to worry, this makes the return on digital deployment that much better, as the upfront capex is roughly the same regardless of location so we might as well get most bang for the buck. I would argue (I don't have proof though) that this will put downward pressure on the avg monthly static rates that Lamar reports for its bulletins and posters, as the "best" static boards are being taken down and replaced with digital. Specifically, a digital board all-in capex is $200k but varies dependent upon size, location, etc; and the board lasts for 10 years (according to both Lamar and the underlying 2 manufacturers, Daktronics and Yesco, that Lamar buys the LEDs from). The board handles 6 slots at 6-8 second intervals, and Lamar seeks to fill at least 5 of the 6 slots, with each slot priced comparable to a static board. During its useful life of 10 years, very little maintenance is required and opex are in fact lower than static, as a truck and man hours are not required every month or few to replace the static image (digital images are deployed remotely), and electricity expenses for digital are higher but remember that static boards still require traditional illumination during evening hours.
As noted above, the result is that digital generates 4-6x the revenue of a static board and almost twice the EBITDA margin, at 70% according to mgmt.
Lamar had about 1,220 deployed, on average, over the 1st quarter. We don't know the occupancy rate but presumably it's close to 100% based cherry picking the best locations, and at least 80% based on filling at least 5 of 6 slots. Mgmt quoted digital revenues at about 12% of revenues, implying $30.6mm in revenue generation for the quarter and a blended (both poster and bulletin) monthly rate $8,370. This compares to avg static Q1 rates of $415/month for posters and $1095/month for bulletins, with avg occupancies of 58% and 72%, respectively. Recall that digital boards are deployed in place of the best, not the avg static board, hence the dispersion in the figures above is wider than reality. Also note that Q1 is seasonally the weakest quarter.
2 things may be obfuscating the recovery picture to date
- As noted prior, Lamar is deploying digital billboards in place of their best (highest monthly rate) static boards. As a result, their reported monthly rates continue to have the better static boards pulled from that population, resulting in downward pressure on the remaining static "average rate".
- In past recession Lamar would remain firm on rate and sacrifice occupancy as a cost of that decision. The result was a quicker recovery as occupancy would return and rate was already there. This past recession forced Lamar to cut rate as well, which mgmt noted would result in a slower recovery as rates at contracted forward 1 to 12 months. The sell-side continues to note a slower local recovery for Lamar, yet it seems this slower recovery is in line with management's comments over the past 2 years.
Compelling Valuation
The company trades at 10.5x EV/2010 EBITDA and 9.6x my 2011e EBITDA of $510mm. Prior to mid-2008, the company has never traded at less than 12.5x EBITDA since its 1996 IPO. Over the last 10 years, inclusive of 2008 and 2009, EV/EBITDA multiple has averaged just under 15x. As Buffett says, "the toothfairy does not pay for Capital Expenditures" so I'll of course walk through a few valuation methodologies that better estimate if LAMR is absolutely attractive as current trading prices.
Recognizing it has a levered balance sheet (Debt/ttm EBITDA of 5.0x), Lamar has a 2011e FCF yield on mkt cap of 8% vs 10% trailing, as CFO will increase slightly but management intends to ramp up capex from $50mm in 2010 to $100mm in 2011 to fund its digital rollout. Given roughly half of forward capex are in fact for growth versus maintenance purposes, it's worth noting that 2011e CFO less maintenance capex ($50mm) may yield 12% on mkt cap.
Management continues to stress its intentions to funnel cash flow toward delevering the balance sheet. In the context of total debt of $1.9b, Lamar's FCF can pay down more than 1/10th of debt every year, which represents half a turn of leverage that will accrete to equity shareholders annually if the company does aggressively pay down debt. Mgmt also notes the company has the cash generating ability to pay down $200mm of face value annually.
What Lamar could look like in ~5 years (YE 2015)
Admittadely, we cannot assume every static board is a candidate for digital. Management has said so as well. There's been no guidance as to what level of digital penetration is (#1) possible and (#2) economically feasible. I make the mid-term assumption of 300 new digital boards per year through 2015, which implies 2,700 by year end 2015. I assume no other organic growth so total displays will still be 147,000 and digital will represent less than 2% of total boards under that scenario - hardly saturated in my opinion (note that competitors are no more aggressive in their rollout plans in the near-term as well).
With that portfolio, Lamar would have about 66,250 static bulletins, 78,250 posters, and 2,700 digital boards. At today's rates and today's trailing avg occupancy ($426 and 67% for Posters and $1,110 and 74% for Bulletins), that portfolio would generate revenues of $1.28b and EBITDA of $615mm given what will be higher margins from digital contribution. Over the next 5 years, I estimate Lamar could generate a cumulative $1.3b to $1.4b in Free Cash Flow (CFO-Total CapEx), before term loan amortization payments. Lamar has term loan amortizations totalling $143mm through 2014, and an additional $170mm in 2015, so about $1.0b might be available for add'l debt paydown or other forms of returning to shareholders. I make the assumption (which will of course be proven wrong in time to some degree) that the company will accumulate a modest amount of cash and pay down the remainder of the term loan balance and it's expensive 9 3/4% Senior Notes of which $326mm is outstanding:
| Capital Structure |
Q1 2011 |
2015e |
|
|
|
| Cash |
32 |
130 |
|
|
|
| $250mm Revolver due 4/2015 |
|
- |
| Term Loans A-1, A-2, B |
754 |
- |
|
|
|
| 9.75% Senior Notes |
326 |
- |
| 7 .875% Senior Sub Notes due |
400 |
400 |
| 6.625% Senior Sub Notes due |
872 |
872 |
| Other |
3 |
3 |
|
|
|
| Total Debt |
2,355 |
1,275 |
|
|
|
| Price |
$28 |
|
| a class |
77.7 |
|
| b class |
15.1 |
|
| Shares (class a + b) |
92.8 |
|
| Mkt Cap |
2,692 |
|
Parts of the above scenario are rosy but parts are conservative. The theme here is some optionality if things improve on the static side, while even the current status quo would result in a decent underlying return on one's capital through steady cash generation and deleveraging.
If we're remotely right, it's easy to see how Lamar shares could be worth in the $60 range. Given the above 2015e capital structure, at current EV/EBITDA multipel of 10.7x and '15e EBITDA of $615mm, Lamar shares would trade around $60. $67 at a more historical 12x EBITDA and $40 at a multiple of 8x, but again on that same 615 EBITDA estimate. If we're anything better than completely wrong, we shouldn't lose our shirts.
If digital has hit some level of saturation for Lamar at 2,700 boards, CapEx will decline back to more maintenance levels of $70-$80mm (includes add'l maintenance capex for short-lived digital boards). FCF would be in the $400mm range or above as a result a leverage (on the back of my debt paydown assumptions) modest at 2x. Despite non-controlling ownership, a very reasonable 10x FCF multiple for the now unlevered equity shares would imply a $45 share price and of course higher at more aggressive FCF multiples.
Looming Issues
The argument has historically been made that although TV ad dollars have vanished due to DVR/Tivo, and Newspaper ad dollars due to online readership, boards have held market share. Moreover, the argument that as other firms are disrupted by technology, board ads may increase in value given their stability and tenure as an alternative. It might even make sense that digital's 'real-time' aspect, which FBI Most Wanted and local events ("County Fair this weekend, fri-sat") have utilized, may increase the addressable market and client base. But the following are some issues I don't fully have my head around to date:
- Does continued smart phone adoption usage drive advertising dollars away from boards? (or has that already started? ... I can't imagine a hotel getting any sort of return on investment by paying for a board ad these days) With google maps or even apps like Yelp, Where, AroundMe, is there any value to a motel advertising that it's located just off the next highway exit? Do steep discounting mechanisms such as Groupon (analyst asked about Groupon as a threat Q1 2011 call), while different than a branding/advertising tool such as a billboard, potentially exhaust or at least eat into available marketing dollars of a local business which might have historically been spent on a billboard ad?
- Pricing power - a respected investor I spoke with asked, after hearing the Lamar story, "do they have the ability to raise prices, especially as digital increases inventory?" A valid question. Digital increases inventory by 5 panels on each deployment. In theory, in every board converted to digital (impossible but a decent hypothetical example), U.S. board inventory would go up 5-fold... and rates would surely come down whether half are in non-conforming or not. To date, the digital deployment by all players seems controlled and disciplined, and permits restrict an absolute overnight increase in supply. Even on static, where supply is more fixed, pricing power is limited especially in areas where occupancy does not approach 90 or 100%.
- NIMBY (not in my backyard), while a barrier to entry on one hand, has led to political risk on the other - there have been cases of municipalities forcing Lamar to take down a board under the premise of "amortization".
- Is there some application or use of technology not in play today that will disrupt the value in the board industry?
Priorities for Free Cash Flow generation according to management
- Pay down debt CFO quotes opportunity size as much as $200M of face value debt annually.
- continue to invest in digital platform (although this is CapEx which is part of the FCF equation, mgmt is referring to taking last year's FCF and funneling into new digital CapEx in future years)
- acquiring "dirt beneath us" - in other words, buying out leases on the land below bulletin structure which allow for margin expansion in future years as lease expense (and annual escalators) no longer exist for that specific site.
- modest M&A. Mgmt quotes from 2010 year end call "there's a dearth of good opportunities ...it's not a pricing consideration. We just are very pleased with where we think our internal growth can go with our investment in our digital platform."
Family/Control ownership
While the argument can be made that it'd be better/cheaper/easier to acquire an incumbant than attempt enter the industry organically, for Lamar's case we must note that this is a family-owned business, with the Reilly family owning 17% of shares outstanding (assuming conversion of all of their class B shares to class A, which is convertible on a 1:1 basis), however, their voting power is 66% as a result of Class B shares. As a result, they control the Board, mgmt policies, assets sales and merger/acquisition decisions, etc.
Catalyst
- cheap relative to cash flow generation
- earnings growth through digital rollout
- deleveraging via debt paydown