Lamar Advertising: Six Reasons To Be Bullish But One Big Risk (NASDAQ:LAMR)

Lamar Advertising (NASDAQ:LAMR) shares have been battered, falling 14% thus far in 2023. Shares have suffered from a confluence of factors including: a continued rise in long-term interest rates which have negatively impacted REITs as well as a slowdown in advertising which led management to lower full year guidance.

Presently, I believe Lamar is a very good business (described below in ‘Six Reasons to be Bullish’) which will generate growing cash flows for the next several years.

However, as I describe in the ‘Risks’ section, I am mindful of the long-term existential threat posed by the eventual mass adoption of self-driving cars which tempers my enthusiasm for Lamar shares. While I have a small position in Lamar shares, I find that I am unwilling to average down as the stock falls (as a value investor, I typically average down on my positions as they decline), indicating that I think the stock is a ‘Hold’ rather than a ‘Buy’.

Current Results

As highlighted above, management noted a slowdown in customer activity in 2Q23 which led to a decrease in full-year FFO guidance by 3.8% (at the midpoint of the guide). While management had anticipated a softer ad environment for national account spending, local advertising (which represents ~80% of Lamar’s business) has weakened since the beginning of the year. By industry type, key areas of weakness included insurance and real estate advertisers despite strength in amusement/entertainment and financial client advertising.

Six Reasons to be Bullish

While shares have been, I view Lamar as an attractive investment at today’s price given:

• Strong balance sheet with net debt to EBITDA of 3.8x.
• Favorable medium term trends in outdoor advertising, bolstered by continued positive shifts toward digital billboards. Despite the proliferation of digital media which has displaced traditional print, television, and radio advertising, outdoor advertising has continued to grow at/above GDP over the past decade. Further the gradual increase in digital billboard advertising (currently 30% of revenue) should lead to outsize revenue/EBITDA/FFO growth.
• Lamar has very strong market position in its key rural and suburban markets (30+% market share) and relatively little exposure (sub 10%) to mass transit advertising (subway, bus ads) in big cities. Relative to pre-pandemic levels, mass transit advertising has suffered greatly from decreased ridership as most workers are only spending ~3 days per week in the office. This has had an outsized impact on outdoor advertising competitors Clear Channel (CCO) and Outfront (OUT).
• Lamar benefits from significant barriers to entry as local regulations prevent the addition of meaningful new billboard supply.
• Potential for a meaningful rebound in results over the next 2-3 years as concerns over consumer spending eventually wane leading to a pickup in adspend.
• Attractive valuation at just 11x FFO, 12.7x EV/EBITDA, and offering a 6.3% dividend yield.

Given these positive characteristics, I’ve taken a small position in Lamar. That said, as I describe below in the ‘Risks’ section, I am mindful of the long-term threat posed by mass adoption of the self-driving car which tempers my enthusiasm for Lamar shares.

Risks – Two Boilerplate & One Existential

• In the near term, a weakening economy could cause continued softness in advertising.
• Further rises in interest rates could lead to a further sell-off in REITs.
• Long-term, Lamar Advertising will likely be negatively impacted when self-driving cars become a reality. Self-driving cars will eliminate the need for drivers to pay attention to the road which poses an existential risk to billboard advertising. In my opinion, this is the biggest risk to the company. That said, I don’t see self-driving cars becoming a meaningful percentage of the total US vehicle fleet for a decade plus. That said, my portfolio weighting is heavily influenced by this risk (Lamar is a relatively small holding for me). Were self-driving cars not a long-term threat, my position in Lamar would be considerably larger.

It is worth noting that not all market participants seem concerned about the risk associated with self-driving vehicles as evidenced by last week’s take private of parking lot operator SP Plus (SP) at a 52% premium. Mass adoption of self-driving vehicles will almost certainly decrease the necessity of parking garages (cars would be part of ‘shared’ fleet networks and be utilized, rather than parked) and diminish the value of SP’s business.

Conclusion

Without the looming long-term risk of self-driving cars, given its many positive economic attributes, Lamar would be a top 5 or 10 position for me at today’s price. However, because of this concern, my position in Lamar is relatively small and as I mentioned in my introduction I am unwilling to increase my exposure here. As such, while there is much to like about Lamar, I rate the stock a ‘Hold’.