The Real Story: Lamar Advertising

Keep in mind, consensus earnings estimates have dropped over the past six months to 41 cents from 53 cents in 2005 and to 60 cents from 75 cents in 2006. I don't know about you, but if I'm going to pay a sky-high multiple, I want to see earnings estimates revised in the other direction.

Some will argue that P/E is not the right metric in which to value Lamar, that earnings before interest, taxes, depreciation and amortization (EBITDA) would be more appropriate. If you insist on using EBITDA as your metric, Lamar is trading at a 17% premium to Clear Channel Outdoor (CCO Quote), which is better positioned in major metropolitan areas.

But valuing a company on the basis of EBITDA instead of EPS is usually reserved for start-ups and businesses that are not profitable. Lamar is not a start-up company. It has been around for over 100 years. It became profitable in 2004 after six consecutive years of operating in the red. Lamar earns a profit, and that profit is growing; therefore, P/E is an appropriate metric. Furthermore, annual revenue growth is expected to slow from 29% in 2005 to 7% in 2006, according to First Call.

Here's something that really rubs me the wrong way -- the Reilly family, including CEO Kevin and COO Sean, has created Class B shares that come jam-packed with 10 votes per share. Guess who owns those shares? The family controls about two-thirds of the voting stock. So if shareholders are not happy with any aspect of the way the business is being run, there's not a darn thing they can do about it.

Lamar did not return phone calls seeking comment.

What's It Worth?

Lamar is most often compared with the radio group. Including Clear Channel Outdoor, the group has a forward P/E of 25 vs. 77 for Lamar. While outdoor companies deserve a premium over radio, a 212% premium seems a bit rich. Let's be overly generous and assign Lamar a 100% premium over radio. On the basis of 2006 consensus EPS estimates of 60 cents, Lamar should trade at around $30 -- and that's assuming the company actually hits that earnings target. If the performance over the past eight years is any indicator, that's highly unlikely.