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On Dec 2, we downgraded our long-term recommendation for outdoor advertising services provider Lamar Advertising Co. (LAMR - Analyst Report) from Outperform to Neutral. The company’s expansion through a combination of organic growth and strategic acquisitions augur well for its growth prospects. However, increased capital expenditures and higher expenses related to the acquired outdoor advertising assets could weigh on the margins moving forward.

Why the Downgrade?

An integral part of Lamar’s growth strategy is hinged upon continuous acquisition of outdoor advertising assets. However, in the regulated outdoor advertising industry, acquisitions either tend to be marginally profitable or require considerable investments for maximization of profitability.

In addition, although the company enjoys a significant market share in many of its small and medium-sized markets, it also faces competition from other outdoor advertisers and other forms of media in all its markets. Lamar competes against larger companies with diversified operations such as television, radio and other broadcasting media. These diversified competitors have the advantage of cross-selling complementary advertising products to the advertisers, which further reduces its profitability.

As management takes measures to boost the company’s top-line growth through acquisitions, increased debt associated with these acquisitions may put further pressure on earnings. Lamar had a long-term debt of approximately $1.7 billion exiting the third quarter of 2013. Despite the high level of debt outstanding, the terms of the indentures governing Lamar Media’s notes and the terms of the senior credit facility allow it to incur substantially more debt. This undermines the growth potential of the company to some extent.

However, Lamar has achieved success in increasing occupancy of its existing advertising displays, raising advertising rates and acquiring new advertising displays. The company’s internal and external investment activities have allowed it to capture a considerable share of localized outdoor advertising markets. Given the company’s large and growing national presence, there is additional upside going forward, as it builds national presence and expands relationships with larger advertisers.

Lamar’s billboard advertising business is also well diversified, with a major share of its revenue coming from restaurants, retailers, hospitals and health care advertisements. The company also has a large and growing presence in the transit-related advertising market. These augur well for its long-term growth potential.

Other Stocks to Consider

Lamar has a Zacks Rank #3 (Hold). Other players in the industry worth considering include Publicis Groupe SA (PUBGY), YuMe, Inc. (YUME - Snapshot Report) and ChannelAdvisor Corporation (ECOM - Snapshot Report), each carrying a Zacks Rank #2 (Buy).

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