Elevated Growth And Calculated Acquisitions Propel Media Giant Forward Amid Ad Challenges

Key Takeaways

• Solid local and regional demand, alongside programmatic advertising in digital out-of-home media, promises sustained revenue growth.
  
• Lamar Advertising's strategic focus on acquisitions and its strong financial position suggest potential for further revenue and earnings expansion.
  
• Lamar Advertising's growth and profitability are at risk from reduced national ad spend, over-reliance on unpredictable local ad demand, and uncertain M&A opportunities.

Catalysts

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

• Solid local and regional advertising demand is expected to drive revenue growth, especially as it compensates for the softness in national advertising, indicating potential for sustained revenue improvements.
  
• The anticipated increase in political advertising in Q4 could provide an unexpected boost to revenues, particularly if it surpasses current expectations.
  
• Programmatic advertising's strong performance, particularly in large format digital out-of-home media, is expected to continue enhancing revenue streams, even though year-over-year growth may moderate due to tougher comparisons.
  
• The company's strategic focus on acquisitions, with spending expected to be around $40 million to $50 million and a forecasted increase in M&A activity as the market picks up, suggests potential for further revenue and earnings growth through expansion.
  
• Lamar Advertising's exceptional balance sheet condition, highlighted by low leverage and strong liquidity, positions the company to capitalize on investment and acquisition opportunities, potentially leading to increased earnings and shareholder returns.

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 23.3% today to 28.3% in 3 years time.
• Analysts expect earnings to reach $697.9 million (and earnings per share of $6.39) by about September 2027, up from $504.3 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 22.8x on those 2027 earnings, down from 27.0x today. This future PE is lower than the current PE for the US Specialized REITs industry at 29.7x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.19%, as per the Simply Wall St company report.

Risks

• The continued softness in some national customers could lead to decreased national ad revenues, impacting overall revenue growth and profitability.
  
• The reliance on strong local and regional demand to offset national revenue softness may not sustain long-term revenue growth if national ad spend does not recover, affecting diversification and stability of revenue streams.
  
• A potential downturn in the economy could negatively impact local and regional advertisers more significantly, leading to a decrease in advertising spending and consequently lower revenues for Lamar.
  
• While acquisitions contribute to growth, a slowdown in M&A activity as mentioned might limit Lamar's ability to quickly expand and diversify its portfolio, potentially affecting long-term revenue and EBITDA growth.
  
• Lamar's anticipation of an uptick in M&A activity into 2025 suggests reliance on external growth opportunities that might not materialize as expected, potentially impacting revenue and earnings growth if the market conditions change or anticipated deals fall through.

Valuation

• The analysts have a consensus price target of $128.8 for Lamar Advertising based on their expectations of its future earnings growth, profit margins and other risk factors.
• 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 $697.9 million, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 6.2%.
• Given the current share price of $133.27, the analyst's price target of $128.8 is 3.5% lower. 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.