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I am currently pursuing an MBA at Columbia Business School, and previously worked with M&A and equity market applications at Bloomberg LP. My stock selections are generally value plays and attempts at uncovering Warren Buffett "cigar butts" on the market. They're always there. You... More
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  • Digital means dollars for Lamar

     

    model LAMR 

    Investment Summary:

    LAMR is more attractive than it has been in 3 years, as the company turns the corner with capital structure challenges and makes substantial commitments to the high margin digital billboards business.

    Company Description:

    Lamar Advertising is the third largest outdoor advertising company in the United States, selling advertising on billboards, buses, shelters, benches, and logo plates.  The majority of revenues come from billboards, which makes up 70% of company revenues.

    Market Picture:

    Media Types

    CPM

    Billboard - 30-Sheet Poster

    $2.05

    Radio Ad - During Prime Drive Time

    $8.61

    Magazine - One page

    $9.35

    Television Commercial - 30 Seconds

    $17.78

    Newspaper - 1/3 of a page

    $22.95

    Billboard advertising makes up a small portion of total advertising spend in the U.S., but billboards provide companies the opportunity to present regionally relevant messages to consumers outside of the house for a deep discount, on a CPM (Cost Per Thousand Views) basis.  In just the last 5 years the digital billboard was introduced to the market and changed the game for capturing higher margins in an otherwise static market.  Based on estimates of revenue breakdown, digital billboards command 10-20 times the revenue of a traditional billboard. 

    Catalysts for Growth:

    ·         LAMR is producing steady cash flow to help support an active debt repurchase program, with enough excess cash to continue aggressive spending (50% of Cap Ex) on Digital Billboard production.

    ·         Contract length fell over the last few years with U.S. consumer demand, but average contract length has stabilized with a positive outlook, as companies show historically high cash balances on the balance sheet that is available for advertising spend.

    ·         Market share was stable throughout the recession despite LAMR’s debt struggles, but with extremely high barriers to entry in the industry the company is in a great position to capitalize on digital billboard production and make drastic improvements in profitability.

    Valuation:

    LAMR committed $50 million (half of its CapEx) to digital billboards.  Based on the industry’s per-unit cost assumptions, LAMR should be able to put up around 300 new billboards this year.  Of the 3 years in company history that LAMR scaled digital production to this level, revenues improved by at least  $88 milion, or 8% of last year’s revenues. 

    LAMR should realize 5% revenue growth in 12 months.  This assumes conservatively that half of the projected growth in digital is realized, and other segments continue to grow at 1%.  With small adjustments for trends in the company’s margins and a consensus fwd EV/EBITDA multiple of 8.74, next year EBITDA should reach $5,212 million, pushing LAMR stock up to my $34.00 target. 

    Risks:

    A downside bear case can prevail if economic conditions discourage ad spend by businesses.  This industry is highly sensitive to the macro environment, so in a bear case where growth in the digital billboard business is wiped out and revenue contracts by 3%, operating profit would fall 30% short of forecasts, with a downside of -17.5% on the stock.  Legislation against billboards could also occur, but this is largely a local issue in which individual cases will not materially impact the business.  



    Disclaimer:  I do not hold a position in LAMR nor do I plan to in the next 72 hours.

    Dec 04 10:52 PM | Link | Comment!
  • Best Buy Blues

    Best Buy:  An exercise in valuation
     

                BBY has focused the last few years on expansion, in what looks to be a desperate hunt for new revenue drivers. In the last fiscal year BBY opened 123 new stores in Europe alone, but even a few years into this aggressive international expansion the firm has not seen significant impact to their bottom line.  While 35% of firm revenues come from abroad, these stores abroad represent a paltry 3% of operating profit.  BBY’s recent exit from both China and Turkey speak to the difficulty they have had in growing internationally, as well.

    BBY's Same Store Sales numbers provide a bit more color to its business deficiencies.  Product-segmented SSS data shows that approximately 56% of all product categories had a negative 3 year average growth, demonstrating an inability to shift the product mix in existing stores to capitalize on changing consumer tastes.  In an attempt to identify new revenue streams, management has looked to expand the brand through acquisition, but given the lackluster performance of existing stores, BBY should focus on how to differentiate its product mix in a way that can be more profitable.    

    A warning sign of trouble is developing for BBY with significant appreciation of inventories, as in the last fiscal year inventory grew at a rate that was 7.19% faster than sales.  Coupled with customer receipts (A/R) that have ballooned over 3x in just as many years, BBY is showing signs that it is unable to maintain its customer base and has a tangible threat of an inventory write-down. 

                The relatively low EV/EBITDA multiple of 3.08 reflects warranted concern that BBY is not in a good position for growth, given its inability to drive sales and a grim outlook for a significant portion of the markets where it currently does business.  The long-term portion of BBY debt is also trading at a sizable discount, as bondholders drive 5 and 10 year CDS spread values up as they look for protection.  Going concern is not yet a threat, but management must make significant moves in order to compete in such a highly competitive retail space.

    Valuation: Best Buy

    Using the average three year SSS growth numbers as an indicator for the direction of future revenues, BBY will end fiscal 2012 with near flat sales results, and with such an aggressive expansion strategy will have to find ways to drive the bottom line inspite of increasing SG&A costs.  Using the EV/NTM EBITDA multiple of 3.08x, which fairly prices in market concern in BBY’s ability to improve the bottom line, the target price for BBY is around $22.00 for the end of this fiscal year, with a further decline developing from the potential of either inventory write-offs or further divestment of unprofitable segments in medium term. 


    Disclaimer:  I do not have any positions in any of the securities mentioned in this post, nor do I have any intention of taking a position in the next 72 hours.

    Oct 13 11:54 PM | Link | Comment!
  • McCormick & Schmick's menu of bisque and risk

    The five year price chart of McCormick & Schmick’s (MSSR) is not very appetizing.  This upscale chain-restaurant has been unable to convince investors that it will stabilize operations or grow.  A quick peruse of their financials will tell you that they’ve had a tough year at the cash register, and there seems to be plenty of news on the company to suggest that the future is just as grim.  But distressed companies are not always poor investments.  Given that shares of MSSR are currently trading within two dollars of its 52 week low, is it possible that there is growth potential here that is not yet priced in?

    The income statement is certainly not an effective marketing tool for this business.  It has been 2 years since a P/E ratio could even be calculated for McCormick & Schmick’s as a result of its negative LTM (last twelve months) earnings performance.  The trouble begins at the very top of the earnings statement, as the company has reported negative revenue growth in 9 out of the last 10 quarters.  Since December of 2008, their LTM expenses have exceeded LTM revenues, as well.  Same Store Sales gives you the same story, so the problem is certainly not just one-off impairments from store closings.  

    At a high level the balance sheet also looks sound.  Compared to some industry leaders they show far less reliance on leverage to fund their operations, and have even trimmed an already reasonable debt to equity ratio down over the last year or two.   After some digging, the number that really jumped off the page was the sizeable figure labeled as “Other non-current liabilities”.   While long-term debt appears to be well managed, “Other non-current liabilities” have grown to almost double the size of the company’s short term assets!  Furthermore, the notes in the company filings reveal that over two-thirds of the value of this line item is made up of deferred rent, which on its own has been growing at a year-over-year rate of 15%.   For a company that is not exactly swimming in cash, it looks to me like management is trying desperately to manage cash flow.  This feels like a sinking ship.

    News articles over the last year share a similar sentiment.  Earlier this year the company announced that they were shopping around for a high growth seafood restaurant chain.  (http://www.nrn.com/article/mccormick-schmicks-looks-acquisition-chipotle-menu) With the current state of their operations in mind, it seems quite presumptuous that management would be able to solve their existing operational issues by bringing on another restaurant chain.   

    Additionally, a stock that formally traded steadily in the mid-twenties received an acquisition offer this year from the owner of Landry's Restaurants for just $9.25.  If Tilman Fertitta, a Texas hospitality mogul, doesn’t seem to think a premium (suggesting future growth prospects) is justified, why should we?  Until management makes drastic changes to improve the efficiency of this chain, the bears will be driving the market on this stock.

    It sounds like MSSR could use a change in management, so perhaps an acquisition would be best for the future of this business.  Unfortunately for us, if the company is taken private we won’t be able to benefit as shareholders.  


    Disclaimer:  I have no positions in MSSR and do not plan to buy or sell in the next 72 hours.
    Sep 22 10:39 PM | Link | 1 Comment
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