We have downgraded our long-term recommendation on Lamar Advertising Co. (LAMR), a Louisiana-based leading owner and operator of outdoor advertising structures in the U.S., from Outperform to Neutral. The downgrade rating is backed by the colossally increasing debt pressure on the Company’s earnings due to its continuous acquisition activities.
Though Lamar’s efforts in expanding its outdoor advertising business through acquisitions are encouraging, the resultant expenses, which continue to grow nearly as fast as revenues, may adversely affect the company’s cash flow and operating margin. Moreover, these acquisitions either tend to be marginally profitable or require considerable investments to maximize the profit.
Further, Lamar operates in a highly competitive outdoor advertising and media market, wherein risks of clients shifting their accountability to other agencies may result in the loss of market share, thereby decreasing the company’s profit.
The company faces intensified competition from its peers like Local.com Corporation (LOCM), Clear Channel Outdoor Holdings Inc. (CCO) and Focus Media Holding Ltd. (FMCN). Hence, in this service-oriented competitive nature of the advertising and media industry, attracting new clients and offering the latest products may pose a big challenge for the company. Along with these, slower-than-expected GDP growth in the US may act as an impediment to the company’s profitability.
However, the gloomy prospects are tempered by expectation of a growing outdoor advertising industry in 2012 with a rebound in the Company’s performance going forward. Further, the company continues to emphasize expanding its localized billboard advertising business through various strategic acquisitions which are expected to provide an impetus to Lamar’s revenue growth.
We are optimistic about the increasing demand for advertising and media services which would accelerate the Company’s sales going forward. Moreover, the company’s investments to improve its advertising assets will help Lamar capitalize on every possible opportunity.
The current Zacks Consensus Estimate for earnings per share for the fiscal year 2012 and 2013 are 17 cents and 61 cents, representing annual growth of 759.09% and 255.56%, respectively. Lamar has a Zacks #3 Rank, which translates into a short-term (1-3 months) Hold rating.
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