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.
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.
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.