Dynamic Expansion And Digital Billboards Propel Profit Margins Forward

Key Takeaways

• Revenue and earnings poised to grow from political ad spending, national sales rebound, digital billboards, and programmatic advertising expansion.
  
• Improved financial flexibility and strategic acquisitions enhance operational efficiency and support long-term earnings growth.
  
• Increased expenses, reliance on regional sales, and potential decline in political advertising present risks to revenue growth and profit margins.

Catalysts

Operates as an outdoor advertising company in the United States and Canada.

• Lamar anticipates strong revenue growth from increased political advertising spending and a rebound in national sales, likely improving their overall revenue growth and earnings.
  
• The plan to accelerate the rollout of digital billboards in 2025 suggests potential for higher revenue throughput per location and improved net margins due to the higher ad rates and lower costs associated with digital ads.
  
• Increased activity in the M&A sphere for tuck-in acquisitions is expected to enhance operational efficiencies and potentially increase revenue, contributing to earnings growth.
  
• The growth in programmatic advertising continues to be a major area of expansion, with a particularly strong increase in revenue from new customer categories, helping to drive revenue growth.
  
• Improved financial flexibility, as indicated by low leverage and an extended debt maturity schedule, could lead to cost savings on interest and support future earnings growth.

Lamar Advertising Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lamar Advertising's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.4% today to 27.2% in 3 years time.
• Analysts expect earnings to reach $680.0 million (and earnings per share of $6.53) by about November 2027, up from $511.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.6x on those 2027 earnings, down from 25.5x today. This future PE is lower than the current PE for the US Specialized REITs industry at 28.4x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.3%, as per the Simply Wall St company report.

Lamar Advertising Future Earnings Per Share Growth

Risks

• Lamar's expenses increased by 5.4% on an acquisition-adjusted basis due to spikes in medical costs and contract labor, impacting net margins if these trends continue.
  
• Softness in national sales, which decreased by 2.9%, presents a headwind to overall revenue growth and profitability.
  
• Political advertising, currently a significant revenue contributor, may decline after election cycles, potentially affecting future revenues.
  
• High reliance on local and regional sales, which account for approximately 79% of billboard revenue, could expose the company to risk if regional economic conditions deteriorate, impacting overall revenue stability.
  
• The increased focus on programmatic advertising, while higher in margin due to volume, currently incurs a 10% cost of sale, which is higher than the 6% for traditional sales, potentially affecting profit margins unless costs decrease with scale.

Valuation

• The analysts have a consensus price target of $134.0 for Lamar Advertising based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $122.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.5 billion, earnings will come to $680.0 million, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 6.3%.
• Given the current share price of $127.68, the analyst's price target of $134.0 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.