Lamar Advertising: Whether Or Not It Can Maintain Momentum

Summary

• Lamar has been on a nice run since mid-October 2022.
• The question going forward is whether or not everything is priced in at its current share price level, or it has more upside left in it.
• With programmatic underperforming and less acquisitions expected in 2023, the company will have to bolster programmatic in order to maintain momentum.
• There can be no doubt a recession would slow down Lamar, as ad spend is one of the first areas companies look to cut back on in tough economic conditions.

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After plunging from its 52-week high of $119.30 on April 21, 2022, to its 52-week low of $80.84 on October 13, 2022, Lamar Advertising Company (NASDAQ:LAMR), one of the largest outdoor advertising companies in North America, has been on a nice run, climbing to over $106.00 per share as I write.

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Coming off its third-quarter earnings report, where the company beat on the top and bottom lines, it looks to have the momentum to maintain organic and inorganic growth in 2023, with a solid balance sheet to back it up.

That said, management did state it doesn't expect to surpass the $400 million+ mark in acquisitions it expects to have in 2022, for full-year 2023.

Even in difficult economic conditions, the company has continued to operate at peak occupancy, especially with its premium units, which has allowed it to boost its rates to offset rising inflation costs.

Among its weaker performers in the quarter was programmatic, and in verticals, its gaming unit.

In this article we'll look at some of the details from its last reporting period and what 2023 is shaping up to look like.

Some of the numbers

Revenue in the third quarter was $527.4 million, compared to revenue of $476.9 million in the third quarter of 2021. Revenue for the first nine months of 2022 was $1.5 billion, compared to revenue of $1.3 billion in the first nine months of 2021.

Net income in the third quarter of 2022 was $146.2 million, or $1.44 per diluted share, compared to net income of $106.8 million, or $1.05 per diluted share, in the third quarter of 2021. Net income in the first nine months of 2022 was $372.3 million, or $3.66 per diluted share, compared to net income of $264.5 million, or $2.61 per diluted share in the first nine months of 2021.

Adjusted EBITDA in the reporting period was $251.2 million, compared to adjusted EBITDA of $230.7 million in the third quarter of 2021. Adjusted EBITDA margin in the third quarter of 2022 was 47.6 percent, which according to management, is the leader in the out-of-home industry.

Even though the company had some pressure on expenses during the quarter, its ability to raise prices by approximately 8 percent in the reporting period, after raising prices by over 9 percent in the first half of 2022, allowed it to maintain solid margins.

With the company expecting to continue to make significant acquisitions in 2023, it's important to look at the strength of its balance sheet. In that regard, the company looks strong. It has $79 million in cash on hand, with $739 million undrawn from its revolving credit facility. Its long-term debt stands at slightly over $3 billion. It has no debt maturities until February 2025.

At the end of the reporting period the company had total leverage of 3.19x net debt to EBITDA.

As mentioned earlier, even though the company doesn't expect to surpass the $400 mark in acquisitions in 2023, it still has a robust pipeline it's looking at. The level of its acquisitions will probably be directly related to how the economy performs through the remainder of the year.

On the dividend side, the company paid out $3.50 per share through the third quarter of 2022 and is expected to pay another $1.20 per share in the fourth quarter. Based upon the number of its growing units, I don't see there being a problem in maintaining dividend expectations for the fourth quarter, or in the first half of 2023.

Performance by region and verticals

With its outdoor business, per forma growth was strongest in the Southwest and Gulf Coast region, with its weakest performance in outdoor being in the Northeast region.

At the end of the reporting period the company had 4,285 digital units, up 130 units sequentially. For the first nine months of 2022 the company added 202 new builds, with 88 of them being added in the third quarter.

I think that's important to take into account when considering the performance of the company in the near term, as a lot of those numbers won't have full impact until the fourth quarter of 2022 and onward, suggesting we should see some improvement in the numbers as a result of those new builds, and also from acquisitions during the third and fourth quarters. This is the major reason why I believe it's going to maintain momentum in the first half of 2023, even if there are signs of an economic slowdown.

The major underperformer during the quarter was programmatic, which on a same unit basis was up 2.5 percent. Without programmatic, overall same unit increase would have been 3.5 percent on its digital platform.

Where programmatic had its impact was on its national business, which was up a modest 0.3 percent in the quarter. Excluding programmatic, national growth would have been 1.4 percent. Again, I think the company will have to improve on programmatic in order to maintain momentum throughout full-year 2023. Why I believe that is because of the aforementioned guidance that it's not going to invest as much in acquisitions over the next year.

As for verticals, Amusement and Entertainment increased 23 percent; Education grew 20 percent; Service was up 14.3 percent; Restaurants climbed 8.5 percent; Automotive jumped 8.1 percent; and Retail grew by 6.3 percent. The one vertical that underperformed was Gaming, which fell 7 percent, most of which was associated with gaming apps.

Conclusion

With a highly active year of acquisitions in 2022, what has yet to be determined is what the impact will be from those acquisitions in the third and fourth quarters of 2022 on the first half of 2023; we won't know the full impact on the performance of the company until after the first half of 2023 because the first two quarters of the year will be the first full quarters where the new acquisitions will have fully performed. Based upon the upward move in its share price from October 2022, it appears to me the market has already priced in the new builds and new acquisitions, which suggests to me the stock may be primed for a correction.

If that's how it plays out, it's likely to trade flat until the additional units are included in its performance numbers, which will provide a clearer view on the effectiveness of the company's business strategy and model.

Last, the thing that could have a significant impact on the performance of LAMR in 2023 is if a recession hits the economy. Under those economic circumstances, companies like LAMR can be hit hard because management tends to look first at ad spend as one of the areas to cut back on during those conditions.

If a recession hits and it's a long and deep one, it'll definitely result in a tough year or two for the company. On the other hand, if there is no recession, or the recession is a mild one, Lamar is positioned well to not only endure it, but build its business at the same time.

My outlook for the company at this time if it's more likely to do fairly well in 2023, taking into consideration it's acquisition level isn't going to be as robust as it was in 2022.

If the numbers are good from its acquisitions in the second half of calendar 2022, then I think the company is going to continue to do well, acknowledging it's probably do for a pullback before resuming its upward climb.

Assuming a recession hits the economy, this positive outlook would be pushed further out into the latter part of 2023 or early 2024. That's why waiting for a pullback would probably be the best strategy for those considering taking a position in LAMR.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.