Neutral on Lamar Advertising Company - Analyst Blog

We recently reiterated our Neutral recommendation on Louisiana-based, Lamar Advertising Company (LAMR).

The company is one of the largest owners and operators of outdoor advertising structures in the U.S. with three prime sources of revenue including billboards, logo signs and transit advertising displays.

Lamar's financial results for the third quarter 2010 were impressive as the company reported positive earnings of a cent compared with a 5 cent loss in the comparable quarter of 2009. Results were primarily driven by a higher revenue growth, which was partially offset by a rise in operating expenses.

Net sales grew 5.3% year over year to $286.1 million, above the company's estimate of $284.0 million and roughly in line with the Zacks Consensus Estimate of $286.0 million. Pro forma net revenue growth was 4.6%, slightly above the company's guidance of a 4.0% rise.

Operating expenses soared 3.0% year over year, with a 2.0% and 15% increase in direct advertising expenses and general and administrative expenses, respectively. Cash and cash equivalents increased 43% sequentially while cash flow from operating activities grew 29% to $97.0 million. The company used cash to pay down its debts and spend $12 million as capital expenditures.

For the fourth quarter of 2010, management expects its net revenue to be approximately $275.0 million and up roughly 4.0% on a pro forma basis.

We believe Lamar Advertising is doing exceptionally well through organic growth and strategic acquisitions. As the economy is gradually reviving from the global crisis, an increase in capital spending by companies has been witnessed, which bodes well for companies like Lamar.

Lamar has grown its localized billboard advertising businesses through a combination of organic growth and strategic acquisitions. Its internal and external investment activities have allowed it to capture a considerable share of localized outdoor advertising markets. We expect additional upsides going forward, as the company builds its national sales presence and expands relationships with larger and national advertisers.

However, in the near term, enhanced capital spending in an effort to digitize signs, and higher expenses on acquisition of outdoor advertising assets will put pressure on the company's free cash flow. Also, with small and mid sized businesses facing difficulties in obtaining loans, higher payroll and site lease expenses might adversely impact Lamar.