Description

Thesis: LAMR is an outstanding business with an excellent management team.  Last week, it reported a strong 2Q but cut FY AFFO guidance by -4%, due to marginal softening in advertising trends.  On its call, CEO Sean Reilly described the environment as follows: “I wouldn't call this a Main Street recession. I wouldn't even call it a local ad spend recession. I would just call it a sort of general softening. And it has spread to the local level.  And it's not like we can put our finger on a single thing.  I would just call it sort of a general softening.  And that's what we're hearing from the field.”  This more cautious outlook was echoed by peers CCO and OUT, which are more exposed to the slowdown, given their higher national advertising focus and higher balance sheet leverage.  Therefore, part of LAMRs recent stock weakness can be explained by its sympathy to OUT (down -24% in the past week) and CCO (down -13%).  LAMR is down 10% since earnings and -20% from its February high.  LAMR is trading at a divi yield of nearly 6%, AFFO yield of over 8%, and just over 12x EBITDA (with 3.5x leverage).  This places LAMR’s valuation at the low end of its historical range, and it has well over 20% upside, when it trades back to a more moderate (but still undemanding) valuation.

Business Overview: LAMR is the leading outdoor advertising company across sub-Tier 1 DMAs in the USA. The Company operates in the advertising industry, offering space for advertising on various platforms such as billboards, buses, shelters, benches, logo plates, and airport terminals. LAMR provides a comprehensive service, handling everything from ad copy production to placement and maintenance.  LAMR's operations span 45 states in the U.S. and extend to Canada. The Company's primary focus is on small to mid-size markets, aiming to achieve a dominant market share in these regions.  While LAMR maintains centralized corporate and accounting systems, it employs decentralized management.  Regional managers have significant operational autonomy to go to market in the ways best suited toward the markets they oversee.  This “boots on the ground” approach to management also allows LAMR to source M&A opportunities more readily, as local private operators know who to approach when they are looking to monetize their assets.  In addition, LAMR’s strong balance sheet positions them well to pick off assets from CCO, should its debt burden compel it to sell assets.

Industry Overview: There are three large players in the outdoor advertising industry, which comprise ~60% market share.  These are LAMR, Outfront Media (NYSE:OUT; formerly a wholly-owned subsidiary of CBS), and Clear Channel Outdoor Holdings (NYSE:CCO; formerly a 90%-owned subsidiary of the radio conglomerate, Clear Channel).  Whereas CCO and OUT are more exposed to national advertising, through their large DMA exposure, 80% of LAMR’s revenue comes from local advertising. 

Revenue Drivers: Local advertising tends to be less volatile than national, and it has proven more resilient than national in recent years.  Due to regulation and supply constraints, LAMR operates as a local monopoly or oligopoly in most of its geographies.  Though it competes against other ad mediums, LAMR is the dominant player in most of its markets.  Like other ad mediums, outdoor advertising is cyclical and tends to benefit disproportionately from inflation in the economy.  Once occupancy reaches full levels on its displays, inflation allows LAMR to push price relatively aggressively. 

1. Billboards: LAMR operates around 160k billboard advertising displays across 45 states and Canada. These billboards are of two main types:
   1. Bulletins: Large, illuminated structures targeting vehicular traffic on major highways.
   2. Posters: Smaller structures targeting both vehicular and pedestrian traffic on major traffic arteries and city streets.
   3. In addition, LAMR has around 4500 digital billboards across 43 states and Canada, which contributed to approximately 30% of billboard advertising net revenue.
2. Logo Signs: LAMR rents advertising space on logo signs near highway exits, primarily advertising nearby amenities. The Company is the largest provider of logo signs in the U.S., operating 23 out of 26 privatized state logo sign contracts, with over 139k logo sign advertising displays.
3. Transit Advertising Displays: LAMR offers advertising space on public transportation vehicles, airport terminals, transit shelters, and benches.

Advertising Tenants: LAMR's tenant base is highly diverse.  While its segment exposures can fluctuate meaningfully over the longer term, none of these segments ever comprises more than a fraction of its total revenue.  In 2022, its tenant exposure was as follows:

• Service 14%
• Health Care 11%
• Restaurants 9%
• Retailers 8%
• Auto 5%
• Gaming 5%
• Amusement 4%
• Financial 4%
• Education 4%
• Insurance 3%
• Real Estate 3%

REIT conversion: In 2014, LAMR reorganized its corporate structure to qualify as a Real Estate Investment Trust (REIT) for federal income tax purposes. This strategic move allowed LAMR to leverage a tax-efficient structure, wherein it's mandated to distribute at least 90% of its taxable income to shareholders, exempting that income from federal taxation. This conversion aligns with LAMR's core business of owning and leasing real estate assets for advertising, enabling the company to maximize its real estate holdings' value while ensuring consistent returns to its shareholders.  NOLs have enabled LAMR to pay a lower dividend, amounting to a high-60% of AFFO.  This works out to a 5.6% yield on the current share price.  As its NOLs become exhausted, this payout ratio should increase, resulting in a higher dividend.

Catalyst

Demonstrated stability in local ad trends

Acquisition of CCO's "Lamar-land" assets