Description

At 9x 2009 EBITDA and over a 23% FCF yield, Lamar is at a bargain price. Lamar’s assets generate more than enough cash flow to meet debt obligations, even in its worst case scenario, and the company has reined in growth capex in 2009 to direct over $280m in free cash flow to debt repayment. For the next two years, the company has no need to raise any additional debt and has minimal repayment requirements. At 9x EBITDA you get a very solid business generating strong cash flow and a shareholder friendly management team. 

Business: Lamar owns a network of 171k billboards in the US making it the third largest owner of billboards and the only publicly listed pure play US billboard company. (Competitors: CBS, Clear Channel Outdoor and JC Decaux). There are two key characteristics that make the US billboard business very attractive.  

1)      High barriers to entry: There are a fixed number of billboards in the US. The Highway Beautification act, passed in 1965, made it virtually impossible to erect a new billboard along interstate and federally aided roads. As a result, the supply and LAMR’s competition is fixed. The only way to enter the business or expand is to purchase an already existing asset. 

2)      Technology is not a threat: In fact, technology is improving the economics of the business. People in the US continue to use the road infrastructure, a trend which can’t necessarily be said about watching TV commercials or reading newspapers. Billboards are not being replaced by the internet or Tivo. Digital billboards provide organic growth by expanding the type of advertisements that can be marketed on billboards and improving the economics of the business. For example, it doesn’t make sense to run a 3 day price promotion ad on a static billboard, but with digital boards it is very feasible. This has opened billboards to new advertisers and new promotional campaigns.

Lamar is an advertising company and advertisers have been cutting spending. What the market is ignoring is the resilience of billboards in a recession relative to other forms of advertising. In the past two recessions LAMR never had a year with revenue down more than 2%. 2008 is looking to be down only 1.8%. Recently lowered estimates are for 2009 revenue to be down 4%. No one industry segment comprises more than 10% of revenue, diversifying LAMR’s exposure amongst a variety of industries.   Billboards are one of the least expensive forms of advertising and continue to be effective in reaching customers, making billboard spending one of the last things cut from an advertiser’s budget.   

Valuation:

On a recent conference call Lamar highlighted a worst case scenario in which the bottom drops out and revenues are down 10% (they are only projected to be down 4% in 09). Under this scenario LAMR will earn  $400m in FY 2009 EBITDA (a 20% drop from 2008). They assume their interest rate increases 300bps, costing them an additional $40m in interest expense. Under this scenario the company will still earn just over $200m in FCF, a 17% yield at today’s price. 

A more moderate scenario, with 09 rev down 4.3%, will generate an EBITDA of $454m and $281m in free cash flow. This gives the company a 23% FCF yield.

The market reacted unfavorably to the company’s announced plans to temporarily slow growth in the interest of preserving cash. In 2009, LAMR will only install 100 digital boards as opposed to an estimated 500. Investment in the digital network can be temporarily postponed at no cost and reengaged at anytime. This temporary slow down in growth does not alter the underlying positives of the business or its ability to grow organically in the future.

Management, who owns about 17% of the company, has clearly stated that they would not do an equity offering at these prices and will use cash to repay debt until the credit markets recover. The Reilly family has been running the company for generations and shown to be competent with shareholder interests in mind. Their good corporate governance and management has attracted smart and sophisticated investors, like SPO Partners, at prices much higher than $13.  

Price	$12.30
Class A Shares	78,155
Class B Shares	15,398
Total Diluted Shares	93,553
Market Cap	$1,150,702
Cash	$21,510
Debt	$2,605,917
Convert	$287,000
Net Debt	$2,871,407
EV	$4,022,109

Lamar - 2009 FCF estimate		2009 Estimate	2009e DOWNSIDE
EBITDA		$454	$400
Less: Interest		($154)	($194)
Less: Tax		$13	$30
Less: Preferred Stock		($0)	($0)
Less: Capex		($31)	($31)
Equity FCF		$281	$205
Equity FCF Yield		23%	17%

Clear Channel Outdoor and CBS are the largest competitors to LAMR. Clear channel is trading at 6.5x 09 EV / EBITDA and deserves to be at a discount to LAMR. Clear Channel is 88.6% owned by Clear Channel Communications which was purchased by Bain Capital and Thomas H Lee Partners in July 2008 for $23bn.  This leaves CCO exposed to the credit of its highly levered parent company. In addition to this risk, CCO owns assets in both in the US and abroad. 46% of CCO revenue comes from the Americas and has a 40% EBITDA margin (similar to LAMR), the other 54% of revenue is international and has a 20% EBITDA margin. Internationally the outdoor advertising business does not have the barriers to entry that make the business so unique in the US. CBS is the other large owner of billboard assets in the US. Like CCO, CBS generates a considerable amount of its revenue from international, lower margin assets. CBS’s outdoor business is also not standalone. To own CBS outdoor, you have to own all the parts of CBS, most of which are much more cyclical.  LAMR is the only purse play US billboard company and should trade at a premium to its competitors.

Liquidity: Lamar has used is significant cash flow to repurchase stock over the past few years. They have also taken on debt to fund their roll out of digital billboards. Digital billboards have an ROI of about 30% and are a great growth driver for the company. Given the recent state of the capital markets LAMR has opted to conserve cash and will only convert about 100 boards to digital in 2009 (1/4 of the number of the expected number of conversions). This will free up about $100m in additional cash to be used to repay debt.

The majority of LAMR’s $2.8bn in debt isn’t due until 2013 - 2015. Their first debt maturity is a $287m convert that is putable in 2010. The company generates enough cash to repay the principal without raising additional capital. The convert, trading around $75, is another interesting way to invest in LAMR. 

Catalyst

Lamar is a high quality, defensible business that is trading at a discount price. They do not have any serious liquidity issues and will weather the current recession well. At $12.86, LAMR is close to its 12 year low. LAMR will still be intact when the economy recovers and their return to digital billboard investment will organically drive growth as they exit the recession.