Lamar Advertising Reports a Rise in Q2 FFO, Revenues Up Y/Y

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Lamar Advertising Co. (LAMR), which is undergoing a formal transformation to a REIT (real estate investment trust), reported second-quarter 2014 adjusted funds from operations (:AFFO) of $1.08, up 2.9% from $1.05 in the prior-year quarter.

Net income per share decreased by 33.3% to 16 cents from 24 cents reported earlier, due to loss on debt extinguishment expense. However, decline in interest expense acted as a tailwind.

Net revenues for the reported quarter increased 0.8% to $330.4 million from $327.7 million a year ago.

Quarter in Detail

Operating income dipped 0.4% year over year to $73.0 million. Also, adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) slipped 1.2% year over year to $149.7 million.

During the quarter, Lamar received favorable private letter ruling from the Internal Revenue Service (IRS) for REIT conversion.

Lamar had liquidity of $342.4 million at quarter end, of which $308.0 million was available under its revolving senior credit facility and $34.4 million in cash and cash equivalents.

Free cash flow in the reported quarter dipped 5% year over year to $85.3 million. Lamar defines free cash flow as adjusted EBITDA less interest, net of interest income and amortization of financing costs, current taxes, preferred stock dividends and total capital expenditures.

Guidance

For third-quarter 2014, management expects adjusted net revenue in the range of $330 million to $334 million, rising 1.5% to 2.5% on a pro-forma adjusted basis.

Our Take

This week, Lamar disclosed the buyout of a regional firm – Marco Outdoor Advertising, Inc. – to strengthen its presence in the New Orleans region. With this acquisition, the company added over 150 bulletin faces to its portfolio.

Though the transaction is a strategic fit for Lamar as it will include REIT-qualified, premium billboard assets in its portfolio, we believe that rising operating expenses and competition would continue to impede the growth momentum.

Lamar currently has a Zacks Rank #4 (Sell). Investors interested in the advertising/marketing services industry may consider stocks like MDC Partners Inc. (MDCA), Clear Channel Outdoor Holdings Inc. (CCO) and WPP plc (WPPGY). MDC Partners has a Zacks Rank #1 (Strong Buy), while Clear Channel Outdoor and WPP plc carry a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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