The advertising industry is smack in the middle of a sea change from traditional advertising media, like TV and radio, to the brave new worlds of digital and social. According to Carat, worldwide advertising spending is expected to increase by 3.7% in the current year and 5% next year. Most importantly, digital advertising is expected to grow by 14.4%, outpacing the overall advertising industry. This changing scenario is forcing a lot of traditional “mad men” to consider a new approach. Here are three advertising companies tacking toward the future by increasing their geographic operations and shifting focus to digital platforms.
Expansion drives future growth
Digital billboards are a new and advanced means of advertising, which display outdoor advertisements on a giant screen, rather than on a traditional billboard, which is painted or papered. Lamar Advertising Co (NASDAQ:LAMR) has 1750 digital billboard units in the U.S., which include 972 bulletins and 778 posters. It plans to install 150 digital billboards by the end of the year, out of which it has already mounted 42 units in the first quarter of this year. Lamar sees growth potential in this segment due to high demand for digital billboards; the company targeted a total capital expenditure of $100 million this year, with 50% of that earmarked for billboard installation. Lamar expects this segment’s revenue to increase to $206.2 million in the current year, up from $170.7 million last year.
On Nov. 16, Lamar Advertising Co (NASDAQ:LAMR) filed a request with the IRS to convert its operations into a real estate investment trust, or REIT. The company expects to pay a one-time charge of $5 million to make the move. If the company converts into a REIT, it will not have to pay corporate income tax. Instead, it will have to distribute a minimum of 90% of its taxable income to its shareholders as dividends.
Lamar was planning to start functioning under the REIT structure in the 2014 tax year, but the IRS recently made some changes to policies regarding real-estate companies that can be converted, so the company has to sort through regulations and tax laws before it can make the switch. Lamar expects to generate EBITDA of $562 million in the next year, which will result in taxes of $58 million. If it converts into a REIT, the company will save on its tax bill and improve its profitability.
Optimistic about the future
In the last 10 years, Omnicom Group Inc. (NYSE:OMC) has distributed 99% of its net income to its shareholders in the forms of dividends and repurchases. Recently, it declared a dividend of $0.40 per share in the second quarter, which will be payable on July 11, 2013. This dividend is an increase from $0.30 per share in the first quarter of last year. In the first quarter, Omnicom Group Inc. (NYSE:OMC) generated a free cash flow of $303.1 million. At the end of the first quarter, the company had cash and short term investments of $2.09 billion. With rising revenue opportunities, the company will soon generate increasing cash flow that will help it maintain its dividend payout ratio of 35.20%.
Expansion plans in the international market
International revenue contributes 32% of the total revenue for ReachLocal Inc. (NASDAQ:RLOC). International revenue showed growth of 41%, year-over-year, to $38.7 million in the first quarter of 2013. This was achieved by remarkable performances on the part of ReachLocal’s internet marketing consultants, or IMCs. The company’s international IMC sproduced 90% better than their counterparts in the U.S.; it’s no wonder the company is now quickly pivoting to expand their international reach. It plans to increase its international IMCs by 40% by the end of the year. ReachLocal has already launched an Austrian office in the second quarter of 2013 and will launch a Moscow office in the third quarter.
Here’s the cloud in the sunny sky: the company is adding international IMCs, but only to replace the ones that it already fired. In the first quarter, ReachLocal Inc. (NASDAQ:RLOC) reduced its IMC count by 90 in the first quarter compared to the first quarter of last year in the U.S. This will result in an average revenue loss of around $1 million per month. However, growth in the international market will net the company revenue of about $530 million in this year, up from $455.4 million last year.
The company is doing well on its new product ClubLocal, which is its end-to-end consumer website. ClubLocal was initially launched in Dallas as a test from July 2012 to January 2013. The product showed a positive response, with around 2000 transactions at an average price of $270 and an average rating of 4.5 out of five. The company expanded the product to San Francisco in June 2013, and has plans for launches in other major cities. With a margin of around 30% from every transaction, this will become one of ReachLocal’s major platforms in the future.
The bottom line:
All three major players will continue to benefit from the growth in ad spend, as well as from technological changes that will improve future profitability. Lamar looks attracti, given that the market expects the REIT conversion to be approved. Following this anticipated approval, I expect more upside movement in the stock.
Omnicom Group Inc. (NYSE:OMC) remains committed to high-shareholder returns. Omnicom’s deal with salesforce.com, inc. (NYSE:CRM) will improve its social media marketing offerings, which will help it generate higher revenue.
This stock is also a buy as a long-term investment.
ReachLocal is expanding in the international market, with efficient performance of its increasing force of IMCs. Its new product, ClubLocal, will also provide a revenue opportunity. I am optimistic about ReachLocal’s ability to enhance its top-and-bottom line growth via these initiatives, starting toward the end of 2013 and continuing into the future.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends ReachLocal. Madhu is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Madison Avenue Meets the Information Superhighway originally appeared on Fool.com and is written by Madhukar Dubey.
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