Lamar Advertising Co LAMR (XNAS)

Transcription

1 Morningstar Equity Analyst Report Report as of 29 Jan 2016 Page 1 of 8 Morningstar Pillars Analyst Quantitative Economic Moat Narrow Narrow Valuation QQQ Fairly Valued Uncertainty High Medium Financial Health Moderate Source: Morningstar Equity Research Quantitative Valuation LAMR uusa Undervalued Fairly Valued Overvalued Current 5-Yr Avg Sector Country Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Source: Morningstar Bulls Say OThe Highway Beautification Act of 1965 limits the number of new billboards that can be built, limiting supply in the U.S. OLamar has been slightly more aggressive than its two large U.S. competitors in rolling out digital billboards, a key growth engine for the business. OWe believe there eventually will be a more robust audience measurement system than the basic traffic counts used today. For example, a sample based on portable devices would allow advertisers to better pinpoint the demographic mix of who is passing their billboards. Bears Say OWhen Lamar converts static billboards to digital on land it does not own, it may have to share a higher percentage of sales with the landowner. OLamar's rollout of digital billboards could be slower than desired because of specific regulatory issues in its various counties and cities. In some cases, we suspect local authorities are simply trying to extract more value from the billboard operators. OLamar's relative sales growth would come under greater pressure should smaller markets experience an economic slowdown. Dropping Coverage for Lamar Advertising Peter Wahlstrom, Analyst, 07 August 2015 Investment Thesis The top three outdoor advertising firms in the United States generate about 75% of billboard revenue, thanks to decades of industry consolidation. Clear Channel Outdoor and CBS focus on the big cities and usually split a majority of sales from the top 50 markets. In contrast, most of Lamar's billboards are in midsize markets, where the company is often the only major player in town, and this has been a modest tailwind for the firm. Strong market share and the regulations limiting new billboards give Lamar pricing power, which has helped the firm generate impressive profitability, with EBITDA exceeding 40% of sales in each of the past five years. The gradual rollout of digital billboards should boost Lamar's long-term growth prospects. Although the capital costs are higher, digital boards have advantages over static boards as digital displays can be changed in a matter of minutes, allowing advertisers to pick specific times to display their messages. Even better for Lamar, the firm can charge a higher rate for peak traffic times such as morning rush hour, making these billboards more profitable for the company. In mid-april 2014 the firm received its favorable private letter ruling from the Internal Revenue Service. As Lamar officially converts to a REIT structure, a dividend of at least 90% of taxable income must be paid out in the form of a dividend. The most obvious benefit to Lamar is the tax shield that the REIT structure provides. In addition, we believe the market is likely to assign a higher multiple to the firm's cash flow as a REIT than as a media company that is valued based on an EBITDA multiple. Still, the ultimate value of the company will be determined by the level of growth of advertising, resulting profitability of its static and digital billboards, and cash flow generation. Brian Colello, CPA, Analyst, 11 January 2016 Analyst Note We are no longer providing equity research on Lamar Advertising. We provide broad coverage of more than 1,400 companies across more than 90 industries and adjust our coverage as necessary based on client demand and investor interest. Economic Moat Peter Wahlstrom, Analyst, 07 August 2015 Lamar has a narrow economic moat as a result of its strong share in midsize markets and long-standing regulations limiting construction of new billboards. The top three outdoor advertising firms in the U.S. generate more than 70% of billboard revenue, thanks to decades of industry consolidation. Clear Channel Outdoor and CBS focus on the big cities in the top 50 markets. In contrast, most of Lamar's billboards are in midsize markets, where the firm is often the only major player in town: In some of these local markets, Lamar enjoys share approaching 70%. Regulation that limits new billboards creates barriers to entry from new competition, as the only way to increase market share is through acquisition of existing billboards. Lamar's competitive position helps generate impressive profitability, which we expect to continue; EBITDA has exceeded 40% of sales in each of the past five years. Valuation Peter Wahlstrom, Analyst, 24 March 2015 We are raising our fair value estimate to $52 per share from $48 as we roll our financial model and recalibrate our cost of capital assumptions to better align with returns that equity investors are likely to demand over the long run. We now assume a 9% cost of equity, down from 10%, aligned with the 9% rate of return we expect investors to demand of a diversified equity portfolio and reflecting a lowered 2.25% long-term inflation outlook. Our updated fair value estimate implies 2015 price/earnings of 20 times, EV/EBITDA of 11 times, and a FFO of approximately 10 times. We project average annual sales growth of about 3.5% through 2019, driven by pricing and higher occupancy rates from current levels. We project average EBITDA margins (which include stock compensation) of 50%, higher than the 42% average margins posted in (primarily due to lower depreciation expense). Risk Peter Wahlstrom, Analyst, 07 August 2015 The company's high debt load limits financial flexibility. Its exposure to midsized markets can be either a headwind

2 Morningstar Equity Analyst Report Page 2 of 8 Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE CBS Corp CBS USD 22,398 13, Clear Channel Outdoor Holdings Inc CCO USD 1,825 2, or a tailwind, depending on the economic cycle. The primary risk is that Lamar could underperform the overall outdoor advertising industry if the slow economic times last longer for the smaller, regional businesses that use its billboards. Lamar faces interference from local governments when rolling out its digital billboard strategy, as several safety concerns have been raised. Management Peter Wahlstrom, Analyst, 17 March 2015 We give Lamar Advertising a standard rating for stewardship. Kevin Reilly Jr. began his career with Lamar Advertising in 1978 and succeeded his father as CEO in He led Lamar through a wave of consolidation in the late 1990s. We believe the management team has served shareholders well since 2009, reacting swiftly to the recession by cutting costs to offset the sharp decline in revenue. Sean Reilly took the reins as CEO from his brother in early 2011 after serving as COO for more than a decade and in other roles for 13 years before that. Kevin Reilly Jr. remains chairman of the board. The Reilly family owns all of the Class B stock, which has supervoting rights and gives the family (as of October 2014) 65% of the voting rights and an economic interest of 16%. Still, we're cognizant that outside shareholders are essentially just along for the ride.

3 Morningstar Equity Analyst Report Page 3 of 8 Analyst Notes Archive Dropping Coverage for Lamar Advertising Brian Colello, CPA, Analyst, 11 January 2016 We are no longer providing equity research on Lamar Advertising. We provide broad coverage of more than 1,400 companies across more than 90 industries and adjust our coverage as necessary based on client demand and investor interest. Lamar Posts Strong Third Quarter; Raise AAFO Guidance Above Range Neil Macker, Analyst, 14 December 2015 Lamar recently posted third-quarter results that were ahead of bottom-line projections but in line with revenue expectations. Management raised its AAFO per share full-year target to a range of $4.55-$4.60, above the high end of previous guidance. There is no change to our narrow moat rating or $52 fair value estimate at this point, and we view the shares as slightly overvalued. Third-quarter revenue came in at $351 million, up 4.7% year over year, as a result of acquisitions, while pro forma revenue growth was 1.8% as a result of strong national growth. Management announced a rollout of 150 digital billboards next year, owing to strong local demand. We remain generally pleased by the level of cost control exhibited during the quarter, as pro forma expenses were only up 1.6%. Pro forma adjusted EBITDA increased 5.3%, and operating margins expanded nicely to 31.8%, up from 25.7%. Adjusted funds from operations increased 12.0% year over year to $124 million, or $1.27 per share. posted second quarter results which, outside of a one-time non-cash valuation allowance, were in line with our projections. Management feels as through the full-year bogey of achieving 10% adjusted funds from operations is in sight, though there are a few minor areas of weakness that bear watching. There is no change to our narrow moat rating or $52 fair value estimate at this point, and we view the shares as fairly valued. Second-quarter revenue came in at $344.2 million, up 4.2% year over year, with fairly broad-based growth. Management admitted that it got too aggressive with its digital rollout, which likely cannibalized some other sites, but we were generally pleased by the level of cost control exhibited during the quarter. Pro-forma adjusted EBITDA increased 3.8% to $155.4 million, as margins expanded nicely (to 45.1%). Adjusted funds from operations increased 14.7% year over year to $118 million, or $1.22 per share. Management noted that the business environment appears to be relatively steady, but there is still some inherent uncertainty. Conceptually, we view Lamar as a well-established business with relatively low capital requirements and a growth component (shift to digital) that should serve the firm well and drive growth in normalized funds from operations over the long term. We currently assume a top-line compound annual growth rate of 4%, steady margin gains, and, as a result, a solid dividend. Management noted that the business environment appears to be relatively steady, but there is still some inherent uncertainty. Conceptually, we view Lamar as a well-established business with relatively low capital requirements and a growth component (shift to digital) that should serve the firm well and drive growth in normalized funds from operations over the long term. We currently assume a top-line compound annual growth rate of 4%, steady margin gains, and, as a result, a solid dividend. Steady Operating Results from Lamar Advertising in 2Q; Shares Appear Fairly Valued After Drop Peter Wahlstrom, Analyst, 07 August 2015 Lamar Advertising stock dropped 10% after the firm

4 Quantitative Equity Report Release: 29 Jan 2016, 19:37, GMT-06:00 Reporting Currency: USD Trading Currency: USD Lamar Advertising Co Class A LAMR Page 1 of 1 Page 4 of 8 Last Close 31 Jan 2016 Quantitative Fair Value Est 29 Jan 2016 Market Cap 31 Jan 2016 Sector Industry Country of Domicile ,239.9 Mil u Real Estate REIT - Diversified USA United States Lamar Advertising Co operates as an outdoor advertising company in the United States. The Company offers billboards, logo signs and transit advertising displays. Quantitative Scores Scores All Rel Sector Rel Country Quantitative Moat Narrow Valuation Fairly Valued Quantitative Uncertainty Medium Financial Health Moderate Price Versus Quantitative Fair Value Quantitative Fair Value Estimate Total Return Sales/Share Forecast Range Forcasted Price Dividend Split Momentum: Neutral Standard Deviation: Liquidity: High Wk uusa LAMR Yr Undervalued Fairly Valued Overvalued Source: Morningstar Equity Research Valuation Current 5-Yr Avg Sector Country Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Price/Book Price/Sales Profitability Current 5-Yr Avg Sector Country Return on Equity % Return on Assets % Revenue/Employee (K) , Quantitative Moat Financial Health Current 5-Yr Avg Sector Score Country Distance to Default Solvency Score Assets/Equity Long-Term Debt/Equity Total Return % / Market (Morningstar US Index) Dividend Yield % Price/Earnings Price/Revenue Morningstar Rating Q QQQQQ QQQQ QQQ QQ Q TTM Financials (Fiscal Year in Mil) 1,092 1,133 1,183 1,246 1,287 1,334 Revenue % Change Operating Income % Change Net Income Operating Cash Flow Capital Spending Free Cash Flow % Sales EPS % Change Free Cash Flow/Share Dividends/Share Book Value/Share 108, , , , ,208 Shares Outstanding (K) Profitability Return on Equity % Return on Assets % Net Margin % Asset Turnover Financial Leverage Gross Margin % Operating Margin % 2,403 2,141 2,128 1,883 1,884 1,949 Long-Term Debt ,006 Total Equity Fixed Asset Turns Growth Per Share 1-Year 3-Year 5-Year 10-Year Revenue % Operating Income % Earnings % Dividends % Book Value % Stock Total Return % Quarterly Revenue & EPS Revenue (Mil) Mar Jun Sep Dec Total , , ,182.9 Earnings Per Share () Revenue Growth Year On Year % Morningstar All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore is not an offer to buy or sell a security; are not warranted to be correct, complete or accurate; and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced, in any manner without the prior written consent of Morningstar. Please see important disclosures at the end of this report. ß

5 Morningstar Equity Analyst Report Page 5 of 8 Morningstar Equity Research Methodology Fundamental Analysis At Morningstar, we believe buying shares of superior businesses at a discount and allowing them to compound over time is the surest way to create wealth in the stock market. The long-term fundamentals of businesses, such as cash flow, competition, economic cycles, and stewardship, are our primary focus. Occasionally, this approach causes our recommendations to appear out of step with the market, but willingness to be contrarian is an important source of outperformance and a benefit of Morningstar s independence. Our analysts conduct primary research to inform our views on each firm s moat, fair value and uncertainty. Fundamental Analysis Economic Moat Rating Economic Moat Fair Value Estimate Uncertainty Assessment QQQQQ QQQQ QQQ QQ Q Star Rating The economic moat concept is a cornerstone of Morningstar s investment philosophy and is used to distinguish high-quality companies with sustainable competitive advantages. An economic moat is a structural feature that allows a firm to sustain excess returns over a long period of time. Without a moat, a company s profits are more susceptible to competition. Companies with narrow moats are likely to achieve normalized excess returns beyond 10 years while wide-moat companies are likely to sustain excess returns beyond 20 years. The longer a firm generates economic profits, the higher its intrinsic value. We believe lower-quality no-moat companies will see their returns gravitate toward the firm s cost of capital more quickly than companies with moats will. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale. Fair Value Estimate Our analyst-driven fair value estimate is based primarily on Morningstar s proprietary three-stage discounted cash flow model. We also use a variety of supplementary fundamental methods to triangulate a company s worth, such as sum-of-the-parts, multiples, and yields, among others. We re looking well beyond next quarter to determine the cash-generating ability of a company s assets because we believe the market price of a security will migrate toward the firm s intrinsic value over time. Economic moats are not only an important sorting mechanism for quality in our framework, but the designation also directly contributes to our estimate of a company s intrinsic value through sustained excess returns on invested capital. Uncertainty Rating The Morningstar Uncertainty Rating demonstrates our assessment of a firm s cash flow predictability, or valuation risk. From this rating, we determine appropriate margins of safety: The higher the uncertainty, the wider the margin of safety around our fair value estimate before our recommendations are triggered. Our uncertainty ratings are low, medium, high, very high, and extreme. With each uncertainty rating is a corresponding set of price/fair value ratios that drive our recommendations: Lower price/fair value ratios (<1.0) lead to positive recommendations, while higher price/fair value Economic Moat COM PETITIVE FORCES WIDE NARROW NONE COMPANY PROFITABILITY Moat Sources: Intangible Assets Switching Costs Network Effect Cost Advantage Efficient Scale

6 Morningstar Equity Analyst Report Page 6 of 8 Morningstar Equity Research Methodology ratios (>1.0) lead to negative recommendations. In very rare cases, the fair value estimate for a firm is so unpredictable that a margin of safety cannot be properly estimated. For these firms, we use a rating of extreme. Very high and extreme uncertainty companies tend to have higher risk and volatility. Quantitatively Driven Valuations To complement our analysts work, we produce Quantitative Ratings for a much larger universe of companies. These ratings are generated by statistical models that are meant to divine the relationships between Morningstar s analyst-driven ratings and key financial data points. Consequently, our quantitative ratings are directly analogous to our analyst-driven ratings. Quantitative Fair Value Estimate (QFVE): The QFVE is analogous to Morningstar s fair value estimate for stocks. It represents the per-share value of the equity of a company. The QFVE is displayed in the same currency as the company s last close price. Valuation: The valuation is based on the ratio of a company s quantitative fair value estimate to its last close price. Quantitative Uncertainty: This rating describes our level of uncertainty about the accuracy of our quantitative fair value estimate. In this way it is analogous to Morningstar s fair value uncertainty ratings. Understanding Differences Between Analyst and Quantitative Valuations If our analyst-driven ratings did not sometimes differ from our quantitative ratings, there would be little value in producing both. Differences occur because our quantitative ratings are essentially a highly sophisticated analysis of the analyst-driven ratings of comparable companies. If a company is unique and has few comparable companies, the quantitative model will have more trouble assigning correct ratings, while an analyst will have an easier time recognizing the true characteristics of the company. On the other hand, the quantitative models incorporate new data efficiently and consistently. Empirically, we find quantitative ratings and analyst-driven ratings to be equally powerful predictors of future performance. When the analystdriven rating and the quantitative rating agree, we find the ratings to be much more predictive than when they differ. In this way, they provide an excellent second opinion for each other. When the ratings differ, it may be wise to follow the analyst s rating for a truly unique company with its own special situation, and follow the quantitative rating when a company has several reasonable comparable companies and relevant information is flowing at a rapid pace. Quantitative Economic Moat: The quantitative moat rating is analogous to Morningstar s analyst-driven economic moat rating in that both are meant to describe the strength of a firm s competitive position. Uncertainty Rating Price/Fair Value % 95% 135% 105% 110% 80% 90% 70% 155% 85% 115% 60% 175% 80% Low Medium High Very High Uncertainty Rating 125% 50% Q QQ QQQ QQQQ QQQQQ

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