Don't laugh--billboards are sexy!
CNNMoney.com
Paul R. La Monica
February 22, 2007 Forget about search, online video and social networking. One of the hottest areas in advertising is one of the oldest -- billboards.
NEW YORK (CNNMoney.com) -- If someone asked you to name the hottest areas in media and advertising today, odds are the billboard industry would not be at the tip of your tongue. Billboards? Who cares about big honking signs on a freeway when you've got commercials embedded in online videos and ads popping up in cool virtual communities like Second Life?
This is 2007, not 1957. Yet, the billboard, or outdoor advertising, business is actually one of the most vibrant segments of the media world. Consider this. Shares of the two largest publicly traded billboard owners, Lamar Advertising (Charts) and Clear Channel Outdoor (Charts), have soared 36 percent and 43 percent respectively in the past 12 months. To put that into further perspective, Lamar and Clear Channel Outdoor have outperformed the likes of old and new media superstars Apple (Charts), Walt Disney (Charts) and Google (Charts) over the past year. Still think billboards are boring? Lamar reported fourth quarter results on Thursday and the company posted healthy growth, with revenues increasing 11 percent and net income up 20 percent from a year ago.
What's more, Lamar announced a new stock buyback program, worth $500 million, and a special one-time dividend payment of $3.25 per share. Shares of Lamar gained about 1 percent Thursday morning on the news. Clear Channel Outdoor, which was partially spun-off from radio station owner Clear Channel Communications (Charts) last year, will report its fourth quarter numbers Friday. Analysts expect revenues to increase 9 percent to $798 million and earnings to increase 28 percent to 15 cents per share. And analysts say that both stocks still look attractive considering how strong the industry's fundamentals are. According to forecasts from advertising research firm TNS Media Intelligence, outdoor advertising sales are expected to increase 5.7 percent this year. The only areas of the media expected to post higher growth rates are the Internet and syndicated television. "Lamar and Clear Channel represent our two favorite stocks.
They are the best way to play traditional media at a time when media fragmentation has encumbered the growth of all traditional media," said Frederick Moran, an analyst with Stanford Group. Moran said that even though television, newspapers, magazines and radio have been hurt as more consumers and advertisers flock to the Web for news and entertainment, billboards are relatively immune from the Internet threat. It's hard to ignore a billboard on a highway or an advertisement on a bus stop. "Increased traffic congestion, increased time on highways and increased time out of the home in general helps these companies," Moran said, adding that since billboards are also typically among the cheaper options for advertisers, the companies have more flexibility to raise prices in good economic times and less risk of seeing a steep drop in demand when the economy is in trouble.
In addition, technology is actually helping boost the growth prospects of the billboard companies as Lamar and Clear Channel plan to add more digital billboards, signs that can change advertisements electronically in order to increase the number of ads that can appear on one billboard, and hence boost sales for the billboard owners. "We're optimistic on the outdoor industry as technology benefits these companies and does not threaten them," said Laura Martin, an analyst with Soleil -- Media Metrics. "Despite the recent share strength, we remain positive on outdoor stocks because the rollout of digital billboards will accelerate free cash flow growth." Still, both stocks took a slight hit earlier this month after Daktronics (Charts), a publicly traded supplier of digital billboard equipment, warned that orders for billboards were down in its latest quarter.
Some interpreted this as a possible bad sign for Lamar and Clear Channel Outdoor. But one analyst brushed aside Daktronics' warning, saying that the weakness could be attributed to the fact that Daktronics opened a new factory during the quarter and moved much of its digital billboard production capacity to that factory. "While [the warning] could be taken as a slowing in the digital roll-out, we don't think so," wrote Jefferies & Co. analyst David Brenner in a research note. "We are not concerned with the orders comment by [Daktronics], and continue to believe that the backdrop for advertising and particularly outdoor advertisers is very bullish this year." To that end, both Lamar and Clear Channel are expected to post healthy gains in cash flow this year.
According to estimates from Thomson First Call, analysts are forecasting cash flow growth of 10 percent in 2007 for Lamar and 12 percent for Clear Channel Outdoor. And earnings per share are expected to increase 30 percent for Clear Channel Outdoor this year and 54 percent for Lamar. Lamar and Clear Channel Outdoor aren't the only companies benefiting from the growth in outdoor advertising either. Media giant CBS (Charts) owns a sizable outdoor advertising division and strength in this unit has helped lift CBS' shares by 24 percent during the past year. Revenues in CBS' billboard business grew 7 percent during the first nine months of 2006 while operating income before depreciation and amortization (OIBDA), a key measure of profits in the media industry, increased 24 percent. Outdoor accounts for about 15 percent of CBS's overall sales and OIBDA. The company will report its fourth quarter results on February 27. Expect to read about it in big, splashy letters. Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties with the companies.
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