It doesn’t take much more than a 70mph glance at Lamar Advertising’s (NASDAQ:LAMR) valuation statistics to wonder: Why is a company in the century-old outdoor advertising industry doing trading at more than 150 times trailing earnings?
The hype priced into Lamar’s valuation comes from expectations that the firm will be able to convert many of its 150,000 existing billboards into higher earning electronic message boards. Yet while the economic benefits of electronic billboards are real, the regulatory challenges associated with electronic conversion are significant, and not fully understood by most investors.
Many billboards situated in top advertising markets today are considered legal, non-conforming by local authorities. Meaning, these structures were legal when they were erected, but an ordinance has since forbidden additional structures and changes to existing structures.
Another electronic conversion roadblock is the fact that hardly any existing billboard structures can support the weight requirements of the electronic equipment. Bolting LED equipment onto a structure designed to display a wallpaper-like advertisement makes as much engineering sense as screwing your plasma TV at home directly into your drywall. New electronic displays have to be built from the ground up and will be subject to stiff regulatory opposition. Operating a static structure confers neither the legal right nor provides the logistical means to operate that structure as an electronic display.
And while new outdoor advertising structures face less regulatory opposition in the mid-tier advertising markets that Lamar dominates, the advertising value created by electronic signs in these markets does not substantiate Lamar’s current valuation.
Outdoor advertising should continue to make up an important segment of the advertising market, and Lamar is well positioned to benefit from the fundamental strength of the outdoor industry. But with expectations as high as they are now, investors may benefit more from cautiousness than participation.
Disclosure: Author has no position in LAMR