Lamar Advertising Company reported an increase in revenue of 3.6% for the first quarter of 2002 compared to the same period in the prior year. Sales rose from $170.4 million to $176.5 million. The increase came mostly from acquisitions of billboards during the previous 12 months. On a “same store” basis, which reflects the growth in revenue on signs owned for longer than one year, the Company reported that revenue was up 1% for the first quarter. Lamar also reported an improvement in net earnings, or rather, less of a net loss. During the first quarter of 2001, the company lost $34.4 million in a very bad advertising market. Lamar’s results improved in the first quarter of 2002 when the net loss was reduced to $16.2 million. Part of the benefit came from lower depreciation expenses, which dropped from $85.4 million in 2001 to $67.1 million this year.
The earnings measure known as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was down in dollars and as a percentage of revenue. EBITDA dropped from $71.2 million in 2001 to $68.1 million in the current year. The margin shrank from 41.8% to 38.6%.
Management at Lamar is cautious about the outlook for 2002, but is beginning to see some improvement in its business. During the past 18 months of declining ad revenue throughout the industry, management began to watch changes in sales and occupancy on a monthly basis. While it is normally better to take a longer-range view and focus on quarterly changes, monthly results provided a close monitoring of market conditions during the recession. According to the monthly figures, management reports that a turn around appears to have been achieved in the first four months of 2002. Aggregate same-store revenue was down in January 2002 from the same month in 2001, giving no indication that an improvement had started. However, February revenue this year was down less than the drop for January. By March 2002, sales were even with the prior year – the market appeared to be stabilizing. In April 2002, revenue was actually up 1.5% over the same month in 2001. One month does not make a trend, but the market has shown some signs of improvement. The strongest markets for Lamar are in the northeastern U.S. and the Midwest. It is too early to declare the recession dead, but the trend appears to be improving at Lamar.
The company reports that the apparent improvement is also reflected in higher pre-sold inventory for the year. At the end of the first quarter of 2000, before the market weakened later in the year, the company had pre-sold 74.3% of its goal of selling available faces for the year. At the same point in 2001, the percentage dropped to just 69% of goal. Like most advertising media companies, Lamar had excess capacity. At the end of the first quarter this year, the company had pre-sold 73.3% of its annual goal, which is about the same as at the same point in 2000. Management states that occupancy in April 2002 was 63% on Posters and 74% on Bulletins, both up from the average for the first quarter.
The improvement for Lamar is coming from more advertising dollars spent by “Main Street” than by “Madison Avenue.” Much of the company’s billboard plant is located in medium-sized and smaller towns compared to its competitors Viacom and Clear Channel. The smaller businesses in Lamar’s market are beginning to advertise more. Many of the large national corporations have yet to open the purse strings again and start expanding their advertising campaigns. The difference between local advertisers and national advertisers has helped Lamar relative to its competitors.
Lamar completed 26 transactions totaling about $76.2 million in the first quarter of 2002, including many small deals as in the past. They reported that the average cash flow multiple was less than 10 times forward EBITDA and approximately 5.35 times revenue or (effective gross income). Management reports that they are not dealing with many distress sellers, as might be expected in an economic recession. Smaller billboard plants in local areas are often owned by successful entrepreneurs who understand the value of their businesses. Lamar is not only the most active acquirer of such plants, the company also has access to capital markets that will allow the acquisitions to continue. Sellers know that Lamar is a qualified buyer. Management’s plan is to spend approximately $200 million per year on acquisitions. While this averages about $50 million per quarter, taxes and other reasons usually make the fourth quarter slower and the first quarter busier than the others. The 15% of the billboard industry not already owned by the three largest companies probably represents about $2.5 billion to $2.7 billion in market value.
Management expects its acquisitions to boost the Company’s profit margin. Many of the sign plants that Lamar is buying are fill-in acquisitions in areas where the company already has billboards. This allows the new signs to be added to inventory and generate incremental revenue, without generating as much incremental expense. Existing expenses for sales and administration do not have to be raised substantially for the new signs. Management estimates that the profit margin contribution on fill-in or tuck-in acquisitions is around 65% of the acquired revenue. To the extent that this target can be achieved, the company’s overall EBITDA margin should widen with the acquisitions.
The company’s new digital image signs, or video billboards, are still in the test phase. The sign erected in Pittsburgh is reported to be generating about $45,000 per month in advertising revenue, while the sign in the company’s hometown of Baton Rouge is generating between $13,000 and $15,000 per month. The market for these signs is still being developed in terms of the best use for the medium. Advertisers with time-sensitive materials may be in the best position to use such a sign. The message can be changed instantaneously so news or price changes can be posted immediately. This can be an advertising opportunity for grocery or drug store chains. It may take time for Lamar to explore the full range of benefits of these signs and develop a customer base that will provide consistent demand for the space.