The Real Story: Inside Lamar's Bad Pitch

The billboard firm has another disappointing quarter and faces myriad challenges.
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You know it seems the more we talk about it
It only makes it worse to live without it
But let's talk about it
Wouldn't it be nice
-- The Beach Boys

The more things change, the more they stay the same. On Tuesday,

Lamar Advertising

(LAMR) - Get Report

once again missed an earnings number and lowered guidance. Make that 18 of the past 33 quarters in which the results or guidance have disappointed the Street.

In fairness, most metrics in the fourth quarter were stronger than expected, but the bottom line got pinched due to larger-than-expected expenses caused by Hurricane Katrina. Lamar spent about $20 million repairing damage to structures in hurricane-affected areas. The outdoor advertiser has another $5 million in hurricane-related expenses that will impact first-quarter results.

But the real story, as I stated in my

column last month, involves a shrinking acquisition pool and operating in ho-hum markets. Additionally, occupancy rates are flat and a few of the company's largest customers are in vulnerable industries.

Fourth-quarter occupancy rates were flat year over year and at historically average levels, despite management's assertion several quarters ago that occupancy rates could "blow through the norms." Lamar is experiencing strength in pricing, but seems to be having difficulty renting out more billboards, despite the seemingly high level of enthusiasm for outdoor advertising. This indicates that Lamar's focus on small and midsize markets just isn't as attractive to advertisers as the major metropolitan exposure of a

Clear Channel Outdoor

(CCO) - Get Report

or

Viacom

(VIA.B)

.

In my previous column, I argued that Lamar needed acquisitions to grow and that it would have a difficult time keeping up the pace of roughly $200 million worth of acquisitions per year. Earlier, management believed it would hit that target in 2005 and 2006. While Lamar did make 73 acquisitions worth $190 million last year, the company said the total would be closer to $150 million in 2006.

The reason acquisitions are vital to Lamar and other outdoor advertisers is because of the tight regulatory environment. It is very difficult to gain approval for new billboards, so the only way to grow (other than through rate and occupancy increases) is by purchasing them. Now Lamar is telling us it will acquire roughly 25% less displays than in the past few years.

Customers

Lamar warned that first-quarter revenue would be $246 million to $247 million, below the $250 million consensus. Management blamed it on the cancellation of a contract by Dodge, its fifth-largest customer. On the conference call, CEO Kevin Reilly declared: "They are going to come back." It wasn't clear if that statement was based on knowledge of existing contracts or optimism. Lamar did not return calls seeking clarification.

While Dodge is cutting back, Chevrolet is another top-five customer. Chevy's 2006 outdoor spend with Lamar is locked in, but its three-year contract can be canceled after this year. Don't forget, Lamar's bread and butter is the local advertiser. So if Dodge is struggling on a national level, Big Earl's Dodge in Beaumont, Texas, may have to cut its ad budget as well.

Historically, real estate has been a top-five customer category. The group can encompass anything from a national homebuilder to a local agent. Real estate has begun to soften in some former hot markets, such as south Florida. Should we begin to see that happen on a national scale, Lamar's revenue could be further impacted.

The company usually mentions which business categories made up its top 10 customer segments. However, that information was omitted from this quarter's discussion.

Digital

While at the same time saying it doesn't want to hype it, Lamar continues to dangle the prospects of digital displays in front of investors like a carrot in front of starving bunnies. On the earnings conference call, Reilly twice said, "It would be nice if we could triple the number of units that we have up now by year end."

Lamar currently has 73 functioning digital displays. Digital is an important development for outdoor advertisers, because while it costs significantly more to build them, digital displays can generate many times the revenue of traditional billboards. Lamar puts as many as six different advertisers on a digital board on a rotating basis, the message changing every few seconds.

But you don't just dig a few holes in the ground and erect your digital display. There are myriad regulations to go through in each state and municipality. As tight as the regulatory environment is for regular billboards, some cities and towns take an even harder look at digital, due to safety and scenic concerns.

I'm not saying Lamar can't triple the number of digital displays. I'm saying it

better

triple them, because I don't see where the growth is going to come from otherwise. You can only raise prices so much. At some point you need to sell more product (acquisitions) or get more customers (occupancy rates). And currently, the trends in those metrics aren't especially nice.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

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. He appreciates your feedback;

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