The Real Story: Lamar Advertising

NIMBY

Now for the macro picture: Lamar's is a simple business. It owns billboards in small to midsize markets. The excitement surrounding outdoor involves novel ideas in major metropolitan areas, such as live models living in a billboard in Manhattan, ads on the outside of public toilets in San Francisco and bus shelters in Miami -- not billboards in Beaumont, Texas.

You know that you're in a tough business when the word "blight" often follows the name of your product. Cities, counties and towns all over the country are attempting to stop "billboard blight" from cluttering their scenery. Local governments frequently drag operators into court in order to protect their scenic beauty. What it means for Lamar and the rest of the industry is that it is extremely difficult to add inventory.

So what do you do if you can't add more billboards? You buy them. Lamar and others in the business have been accumulating companies for years. In 2004, Lamar acquired roughly 80 companies for about $200 million. Management expects to spend the same amount in both 2005 and 2006. Keep in mind, new supplies of billboard companies aren't popping up. The industry is consolidating, not expanding.

What it means is a dwindling supply of acquisition targets. It makes sense to assume that the price of these companies will rise as demand continues unabated, while supply shrinks. It's also a safe bet to believe that the cream of the crop has already been acquired, leaving less attractive candidates to field the remaining offers.

How important are these acquisitions? In 2004, 25% of Lamar's revenue growth was attributed to acquisitions made that calendar year. Over 30% of forecasted revenue growth will come from one acquisition alone (Obie Media -- $40 million) in 2005.

Lamar recently announced a $250 million stock-repurchase program. While that is usually a positive sign, I take that as an indication that the pickins are gettin' slim, despite management's assertions to the contrary.