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The Real Story: Lamar Advertising

Billboards are hot, but the company has mediocre execution and markets and high valuations.

Welcome to

The Real Story

. The purpose of this column is to help you increase your investment returns by selectively going against the consensus. I hope that

The Real Story

will enable you to take a critical view of investment research, news and prognostications. I will offer my contrarian opinion on stocks as well as issues that are important to investors. You may not always take my word as gospel, but it is my intent to get you to, at the very least, question the consensus.

Take, for example, the widespread misperception that

Lamar Advertising

(LAMR) - Get Lamar Advertising Company Class A Report

is currently in the sweet spot.

Wall Street likes the fact that outdoor advertising is difficult to ignore. You can't fast-forward past or change the dial on a billboard. According to the industry trade group the Outdoor Advertising Association of America, revenue grew 7.9% over the first nine months of 2005.

There is also optimism that digital billboards, and their higher margins and revenue, are the wave of the future. Additionally, new technologies for measuring an audience are being developed. Many believe these new tools will add credibility to the industry and perhaps boost prices.

True, Lamar is in a hot sector -- outdoor advertising -- but its execution is mediocre at best, it operates in ho-hum markets and it's valued like a dot-com circa 1999.

I believe this stock is worth closer to $30 than the current $46.

The Real Story

The bottom line with Lamar is the bottom line: Lamar has either missed its earnings forecast and/or warned in 17 out of the past 32 quarters. Lamar has missed or warned in three of the past four quarters. Not exactly the kind of consistency you want to see out of a stock trading at nearly 77 times expected 2006 earnings. No, that's not a typo; this stock is expensive.

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

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TheStreet Recommends

Clear Channel Outdoor

(CCO) - Get Clear Channel Outdoor Holdings Inc Report

, 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.


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.

New Tech, Moving Slowly

Many on the Street believe that digital billboards will stuff outdoor companies full of cash, and there's no doubt the digital displays can bring in many times more revenue than an ordinary board -- and with higher margins to boot.

CEO Kevin Reilly said he would "build 1,000 digital boards today" and "spend every nickel" on smart boards if they had a place to put them. The problem is digital billboards face the same and in some cases even more severe restrictions as regular boards. Digital display manufacturers such as


have cautioned investors not to expect the boards to add meaningfully to their growth.

Advertisers have been clamoring for an effective tool to measure their outdoor messages' reach. Nielsen Media Research just completed a study in Chicago with the "Npod," a GPS-like device that tracks when people pass billboards. However, it's a long way from being rolled out. One problem is that there is no definitive source for where billboards are located throughout the nation. In a large city such as Chicago, that information may be available. However, in more remote locales, where Lamar often operates, the data are harder to come by. The industry will have to encounter an unprecedented level of cooperation among operators, if this initiative is going to work.

With 10 buys or strong buys vs. only three holds, Lamar appears to be a perfect candidate for a contrarian stance. The stock could decline sharply if the host of problems outlined above becomes more evident or if Wall Street analysts end their love affair with the company.


Regarding Lamar, or any future topic, I welcome your feedback, stinging criticisms, heaps of praise and correspondence. Please note: I am in compliance with's

policy of not owning or being short any stocks, so I have nothing to gain from this column, other than glory for being right (hopefully more often than not).

Lastly (for now), let me say what a thrill it is to be included in

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for over six years. In my previously unbiased and now heavily biased opinion,




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As originally published, this story contained an error. Please see

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Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. At the time of publication, Lichtenfeld held no positions in stocks mentioned in this column.