Neutral on Lamar Advertising

We recently reiterated our Neutral recommendation on Louisiana-based, Lamar Advertising Company (LAMR - Analyst Report).

The company is one of the largest owners and operators of outdoor advertising structures in the U.S. with three prime sources of revenue including billboards, logo signs and transit advertising displays.

Lamar has developed its localized billboard advertising businesses through a combination of organic growth and strategic acquisitions. Its internal and external investment activities have allowed it to capture a considerable share of localized outdoor advertising markets.

We expect additional upsides going forward, as the company builds its national sales presence and expands relationships with larger and national advertisers.

In the first quarter 2011, the company reported a net loss of 14 cents per share, reflecting an improvement over a loss of 27 cents in the year-ago quarter and the Zacks Consensus Estimate of 20 cents per share.

The company’s net revenue soared 4.5% year over year to $255.2 million and registered a pro forma revenue growth of 4.2%. The results were roughly slightly below management’s revenue guidance of $256 million and pro forma growth forecast of 4.5%.

Despite witnessing healthy growth both in the top-line and bottom-line results, we believe rising expenses can be a cause of concern for the company, going forward. In the first quarter, direct advertising and G&A expenses increased 3.0% year over year to $148.9 million.

Moreover, enhanced capital spending in an effort to digitize signs, and higher expenses on acquisition of outdoor advertising assets will put pressure on the company’s free cash flow. In the first quarter, the company’s capital spending increased from $8.3 million in the year-ago quarter to $28.8 million while free cash flow plummeted to $26.7 million from $36.4 million in the year-ago quarter.

Moreover, small and mid sized businesses facing difficulties in obtaining loans, higher payroll and site lease expenses might create problems for Lamar. The company faces stiff competition from its peers like Clear Channel Outdoor Holdings Inc. (CCO - Snapshot Report).

For the second quarter of 2011, management expects net revenue to be approximately $296.0 million, up roughly 3.0% on a pro forma basis. Capital expenditure for the full year is likely to be approximately $100 million.

We currently maintain a Neutral recommendation on the stock.

Read the full analyst report on LAMR

Read the full analyst report on CCO