Investors seeking safety of principle and long-term out-performance would do well to only buy companies that dominate their markets. Market leaders often earn outsized profits and dictate what the rest of the market participants can or cannot do. This sets the market leader up for long-term success.
Market leaders include well-known companies like The Coca-Cola Company (NYSE:KO) in carbonated beverages, PepsiCo, Inc. (NYSE:PEP) in salty snacks, and American Express Company (NYSE:AXP) in consumer credit. Each of these companies exploits its market position to keep the competition in check and earn outsized returns on capital.
All competition is local
Lamar Advertising Co (NASDAQ:LAMR) benefits from federal legislation limiting the number of billboards that may be built along interstate highways. Basically, it is really hard to build a new billboard these days, so established players like Lamar Advertising Co (NASDAQ:LAMR) own a scarce resource.
Of course, Lamar Advertising Co (NASDAQ:LAMR)’s chief competitors — CBS Corporation (NYSE:CBS) and Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) — benefit from this as well. What’s more, both of these companies own more billboards and are concentrated in higher-traffic markets than Lamar Advertising Co (NASDAQ:LAMR).
However, Lamar Advertising Co (NASDAQ:LAMR) has an enormous advantage due to its dominance of the markets in which it competes. Clear Channel and CBS Corporation (NYSE:CBS) are concentrated in large metropolitan areas — markets in which billboards are ubiquitous and competition is fierce.
Lamar, on the other hand, is concentrated in smaller markets where only a handful of regional players compete for advertisers. Lamar takes advantage of its national economies of scale to undercut regional competitors while earning higher margins than it would in fiercely-competitive major metropolitan areas. As a result, the company routinely earns higher margins than Clear Channel and CBS.
As the only nationwide player in many of its markets, Lamar can easily defend its market share by undercutting aggressive rivals and driving them from the market before raising prices again. Its series of local near-monopolies will enable the company to continue out-earning its larger competitors for years to come.
Size does not matter
The local nature of competition makes size of small importance in the outdoor advertising industry. Economies of scale are an important part of Lamar’s strategy, but more important is its dominance of local markets. CBS Corporation (NYSE:CBS) and Clear Channel do not dominate their markets like Lamar does, which is why the two companies are aggressively pursuing non-billboard channels.
For instance, CBS Corporation (NYSE:CBS) sells advertising on buses, taxis, subways, and other public modes of transportation. Meanwhile, Clear Channel is aggressively expanding into international markets where regulation is not as favorable for advertisers as it is in the United States. Both of these efforts lack an important component: a competitive advantage.
Neither CBS Corporation (NYSE:CBS) nor Clear Channel will earn outsized profits from their ventures because nothing is stopping competitors from engaging in a price war. Neither company dominates its markets like Lamar, so neither will be able to control the market.
CBS Corporation (NYSE:CBS) owns valuable television and radio assets that do offer the company market control, but it has been unable to translate that into outdoor advertising and is unlikely to achieve it with its current strategy.
Clear Channel has shown no intention of becoming anything other than a large outdoor advertising company with no competitive advantages. Therefore, investors should not expect stable operating performance going forward.
However, Lamar’s control over its markets gives investors visibility into its future and an assurance that the company will continue generating profits for years to come.
Bottom line
Lamar Advertising is a better company than Clear Channel and CBS’ outdoor segment because of its market leadership. Investors would do well to invest only in companies that, like Lamar Advertising, exploit market leadership for outsized profits.
The article How Market Leadership Enables This Company to Earn Outsized Profits originally appeared on Fool.com.
Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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