Lamar Advertising Company announced on February 13, 2002 that revenue was up 6% for 2001 to a record level of $729.1 million. Operating earnings for the same period declined by 2% as fewer advertisers were in the market due to the recession. The results are viewed favorably by management, given the weak economy and the sharp drop in ad spending for other media (radio and TV). Bulletin billboard occupancy is in the mid-70% range and Posters are lower around 65%. Management reported in a conference call with securities analysts that the outlook for 2002 is “slippery”. It is very difficult to predict how much advertising spending will find its way to billboard companies. Lamar expects industry conditions in the first half of 2002 to be like the last half of 2001, characterized by modest demand for outdoor advertising space.
The company also reported in the conference call that the pace of acquisitions slowed as the year progressed. This is consistent with the announcement in the fourth quarter that fewer billboard acquisitions were available at reasonable prices. The total paid for acquisitions dropped each quarter of 2001: $135 million, $120 million, $45 million and $30 million. The low amount of acquisitions in the fourth quarter is typical of previous years. Sellers often defer consummation of deals near the end of the year so that they can plan for taxes. Many transactions are pushed out from the fourth quarter to the first quarter of the following year. Lamar reported that the billboards acquired in 2001 generated $45 million in annual revenue. Applying the price of $330 million for all acquisitions, the overall EGIM was 7.3X. Most of the acquired signs were purchased in small transactions with individual owners and small businesses. The company made most of the acquisitions as “fill ins” for markets where Lamar already has an established market share.
Lamar used a target valuation of 10 times earnings for its 2001 acquisitions. Earnings in this industry is measured as “earnings before interest, taxes, depreciation and amortization”, or EBITDA. “Forward EBITDA” is the amount of operating earnings that is expected in the four quarters following the acquisition. Forward earnings are widely used by publicly traded companies. Expected earnings from the acquired companies did not meet expectations primarily because of the national economic recession and the economic shock resulting from the terrorist attacks on September 11. Consequently, with earnings below expectations and the acquisition price fixed, the actual multiple of forward EBITDA turned out to be higher than planned, or about 11X. Lamar’s overall target acquisition multiple for 2002 remains unchanged at 10X forward EBITDA although each purchase is priced individually.
During the first six weeks of 2002 Lamar closed 11 more acquisitions for a total of $72 million. About half of the purchases were paid with cash and about half with the company’s common stock. One transaction alone accounted for approximately one half of the acquisition spending. A billboard company was purchased for “about $38 million to $40 million” and payment was made with Lamar common stock. Management reported that the form of payment (stock versus cash) did not affect prices paid as a multiple of revenue or earnings.
Management stated that it continues to value acquisition targets at revenue multiples in the range of 6.5X to 7X on average. This is a pricing multiple based on the effective gross income of a sign, which is commonly referred to as the EGIM (Effective Gross Income Multiplier). While the general range of EGIMs is 6.5X to 7X, each transaction price is established according to its own set of circumstances. Bulletin billboards generate higher revenue per face, and tend to have higher occupancy and EBITDA margins. Consequently, prices for Bulletins tend to be at or above the upper end of the range. Poster Panels are smaller signs with lower revenue per face and lower occupancy nationwide. Typical EGIMs for Posters are often 5X or lower.
The company is continuing to make acquisitions when prices are right because management expects demand for billboards to come back strong and fast when the economy turns around. Advertisers that use billboards for certain campaigns realize that there is a very limited supply of signs. Based on the company’s experience in 1991 and 1992, after the last recession, occupancy rates can rise rapidly as local and national advertisers return to normal levels of spending. Demand will be converted to cash for billboard companies even more quickly than 10 years ago because of the speed with which messages can be posted today. By sending an image electronically for printing on vinyl material, a new billboard message can be up on a sign face in two or three days. The time frame was at least two or three weeks in 1991 and 1992.
Lamar has kept its debt level largely under control during its acquisitions, and appears well positioned to capitalize on its expanded plant when the economy recovers. This year marks the 100th anniversary of Lamar and management hopes it will be a record year for sales and earnings.