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Reilly’s selloff comes as Lamar is up over 45% year to date; not a bad reason to sell, but we see more upside here. As the conventional business model of billboard advertising is revamped thanks to digital technology, the industry will enjoy better than expected growth. Conventional billboards are being replaced by digital versions, which have a higher revenue per board metric – as there are multiple customers per billboard. Lamar is still in the very early stages of billboard conversion, having converted around 1,500 of their existing ads to digital, but the company is already seeing positive impacts on top line revenues.
Besides Lamar, the other major publicly traded outdoor advertisers include Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) and CBS Corporation (NYSE:CBS)‘s outdoor division. Clear Channel expects revenues up 3.1% in 2013 driven by growth in digital displays. Clear Channel is already the top outdoor advertiser with nearly double the number of ads – 900,000 – than both Lamar and CBS. Clear Channel does however, have an international segment that is likely to be a drag appreciative potential due to weak international ad spending. Lamar has a very high beta at 2.8, well above Clear Channel’s beta of 1.8. Given the positive outlook for U.S. GDP in 2013 and the ad industry in general, we like Lamar’s ability to capitalize as it continues to convert its billboard fleet, if you will.
CBS, meanwhile, is a major media company that has grown its outdoor advertising unit quite significantly over the past decade, and is now one of the top three advertisers in this space. CBS is expected to grow revenues by 7.5% in 2013, led in part by local broadcasting and its outdoor unit. Much like other media companies, CBS expects its publishing unit to be a drag on performance going forward.
Other major companies relying on advertising dollars are News Corp. (NASDAQ:NWS) and Nexstar Broadcasting (NASDAQ:NXST). News Corp is one of the top 10 service stocks loved by hedge funds in 3Q. The newspaper company is up over 30% year to date after managing to meet or beat earnings expectations each of the past four quarters. The media company does trade on the high end of its peers at 22x earnings, but many investors are holding out for value to be unlocked via a speculated separation of its publishing and entertainment segments.
Nexstar trades in line with other major broadcasting companies, such as CBS, Time Warner and Comcast, but is the only one trading below a P/S of 1.0x. Despite its negative earnings, Nexstar continues to generate strong free cash flow. This cash hoard could translate into a dividend for investors in the near future, assuming that it grows anywhere close to the sell-side’s expected growth rate of 400% next year. From the Invest for Kids Conference – Nexstar is a top pick of emerging manager Kelly Cardwell.
As ad companies throughout the U.S. continue to enjoy positive growth from a recovering economic situation, we see the best opportunities as those in the billboard industry. There has been a major shift from print to online advertising, which is slowly draining newspaper and magazine companies. Broadcasting has held up better than print, but we see the infusion of online streaming video – and social networks that compete with television – as playing a key role over the long term. The niche market that is outdoor and billboard advertising is unlikely go away anytime soon, as it has already gone through a major digitization in recent years.
