Lamar Advertising: Lofty Valuations Skew The Risk/Reward

Summary

• LAMR posts strong headline numbers, though, on an acquisition-adjusted basis, growth was relatively modest.
• Slower expense growth helped drive an in-line EBITDA, with muted capex also boosting FCF numbers.
• FY20 guidance numbers embed political and programmatic tailwinds, raising the bar for a further beat-and-raise.
• With risks of an economic slowdown on the horizon, the risk/reward appears unfavorable at current levels.

As the leader within the out-of-home space, I think Lamar Advertising (NASDAQ:LAMR) remains well-positioned to deliver organic revenue growth in the low-single-digits over the longer-term on the back of its digital exposure, while its strong margin profile should allow it to weather the cycles effectively. I also like the REIT angle to the LAMR story, given the solid cash flow profile and healthy distribution to shareholders. That said, the strong momentum shown in 4Q19, particularly in national sales, has largely been priced into shares at this point. Though near-term political tailwinds could drive shares, I see the risk/reward as unfavorable at current levels, with the coronavirus set to weigh on the economic growth outlook.

Expense Controls Offset Modest Revenue Growth in 4Q19

LAMR posted headline revenues of $462.7 mm for the quarter, up +8.1% YoY, though I would point toward the Pro-forma numbers instead, which paint a more modest growth picture - acquisition-adjusted revenue grew at a modest 2.7% YoY, underperforming prior guidance of 3-3.5% growth.

Source: Company Filings

The top-line miss was mainly due to weakness in the retail vertical, which posted a -5% decline in November and December, reversing the ~2.5% growth seen throughout 2019. In total, the "negative swing" detracted from 4Q results by ~$2.5mm, though January has been tracking well at up "2.6%" per management.

"But the one that surprised us was retail. Quick - a little bit of color on retail. Through October of last year, retail was clicking along at approximately 2.5%. Then in November and December, it turned to a negative 5%. That positive to negative swing cost us about $2.5 million and was a major contributor to our slight miss for the quarter." - 4Q Transcript

The Local/National split remains at 75/25, with the former rising 1.8% YoY in 4Q19 (a sequential deceleration from 3.1% YoY in 3Q19), while National/Programmatic continues to trend encouragingly, increasing 7.7% YoY (a sequential acceleration from 6.9% YoY in 3Q19).

Source: Company Filings

Same-board digital sales also maintained its momentum, rising 4.6% YoY, implying ~$20 million in incremental revenue. LAMR also ended the quarter with 3,542 digital boards, increasing by 10.0% YoY, and adding ~322 faces (including acquisitions) relative to last year. For FY20, management is aiming to add ~250 new build units.

Source: Company Filings, Press Releases

Management also disclosed additional color on performance across verticals, with services (+7%), hospitals (+8%), amusement (+7%), insurance (+42%), and financial (+20%) outperforming, while the auto (-4%) and retail detracted following a weak holiday season. Directionally, the performance across verticals has generally trended in line with the prior year, though the continued strength in financials and insurance is encouraging.

	4Q18	4Q19
Automotive	-2%	-4%
Healthcare (includes hospitals)	8%	8%
Service		7%
Amusement - Entertainment/Sports		7%
Financial - Banks/Credit Unions	9%	20%
Insurance	82%	42%

Click to enlarge

Source: Company Filings, Press Releases

Despite the underwhelming top-line results, Pro-forma consolidated expenses rose a modest ~1% YoY in 4Q (~2.1% YoY for the full-year, in-line with historical levels), driving EBITDA of $215.6mm (+4.7% YoY on a Pro-forma basis). With capital expenditures also modest at $43.3mm in 4Q, free cash flow came in at $135.3mm for the quarter (+7.3% YoY) and $489.2mm for the full-year (+3.8% YoY).

Source: Press Release

Political Tailwind to Support FY20 Numbers

Management remains optimistic, heading into FY20, given the strong political and programmatic tailwinds, driving a diluted AFFO per share guide of $6.05-6.20 for the year. This would imply a 3% pro forma revenue growth (excluding political and programmatic), a $15mm incremental benefit to revenues from political ($8mm), and programmatic ($7mm), as well as pro forma expense growth of ~2.5% YoY.

Source: Press Release

Management is, however, no longer offering 1Q guidance, which could introduce added volatility heading into 1Q; that said, CEO Sean Reilly did note that they were anticipating a solid start to the year.

"So - thanks, Stephen. So we feel really good about how we're going to do in Q1. One thing you're going to notice is we're going to no longer be giving specific Q1 pacings or acquisition-adjusted estimates…with that said, as I mentioned, we think Q1 is going to get us off to a strong start in terms of hitting the goals that we outlined"

AFFO numbers will also be boosted by lower capital expenditures for the full-year, which are anticipated to hit ~$130mm ($80mm growth and $50mm of maintenance), down from ~141mm in 2019. Much of this will go toward increasing new-build activity with a ~250 new build units target for FY20.

Shoring Up the Balance Sheet

LAMR has been notably active on the financing front - in January, the company issued $600mm of 3.75% Senior Unsecured Notes due 2029 and $400mm of 4.00% Senior Unsecured Notes due 2030. Proceeds were used to refinance existing debt, repay the existing term loans, and make a partial paydown on the revolver. Lamar also put in place a new five-year revolver to replace its existing facility. An overview of the company's debt stack post-financing can be seen below:

Debt	('USD Millions)
Revolver	727.1
4% Senior Notes due 2030	400.0
3 3/4% Senior Notes due 2029	600.0
5% Senior Subordinated due 2023	535.0
5 3/4% Senior Notes due 2026	650.0
AR Securitization Facility due Dec 2021	175.0
Total	3,086.5
Net Debt/EBITDA	3.5x

Click to enlarge

Source: Company Filings

Net-net, these moves have lowered LAMR's overall cost of debt by ~300bps, while extending the maturity profile. Leverage, net of cash, has also been lowered by ~300bps to ~3.5x net debt/EBITDA, significantly improving LAMR's balance sheet flexibility.

Another potential implication worth considering is that the expanded financial capacity allows LAMR to expand further. After all, LAMR has shown an appetite for major acquisitions in the past - at end-FY18, for instance, LAMR acquired select assets (~8,500 faces) from Fairway Outdoor for $418.5mm in cash. The acquisition expanded LAMR's digital presence, adding ~135 digital displays while allowing LAMR to consolidate and gain pricing power across existing markets such as North Carolina and Wisconsin. Following the integration of the Fairway Outdoor assets, LAMR is well-positioned to execute on further M&A in 2020.

Fully Valued at ~15x AFFO/share

With shares now trading at ~15x forward AFFO/share numbers, I think LAMR is fully valued at these levels and, thus, would remain on the sidelines at this time. For context, I see LAMR's business as similar to that of housing REITs, given its broad diversification and sticky advertiser base - most housing REITs now trade in the ~14.0x AFFO/share region, leaving limited upside to the multiple, in my view. While there could be upside to top-line numbers should political tailwinds surprise to the upside, the potential risks to the near to medium-term US economic growth path from the coronavirus offsets the potential reward, in my view.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.