Why the Billboard Business Sucks, Even Though It Shouldn't

One of the enduring mysteries of the recovery in advertising is why billboard-advertising giant Lamar Advertising (LAMR) hasn't benefited from it. The stock is down 20 percent this year and its revenues -- although rising -- nonetheless make the company look like it's still stuck in the downswing. This chart is in thousands of dollars:

An analyst source, speaking privately, told me recently it's because Lamar only commands an average of $5,500 per year from the majority of its billboards -- a revenue yield that's pitiful for a modern media business.

On paper, Lamar ought to be perfectly poised to gain handsomely from the upswing in new advertising dollars following the 2009 crash. Owning a billboard is like owning a monopoly on a piece of media: Once you have established the legal right to lease or own the board, you pretty much have it forever. It's like owning 30 seconds of air on primetime TV at 9 p.m. on Thursday, permanently, and no one can ever take it away from you no matter how much more money they bid for it.

On top of that, Lamar's business has a highly diverse client base and its network is locally entrenched, often in rural and suburban America. Even if you can buy new sites, you can (almost) never knock Lamar out of the sites it has already locked in.

Those are considerable barriers to entry for rival billboard companies. On that basis, profits should be high.

Too many sites, not enough clients
Yet Lamar recorded yet another loss in Q1 2011. With the stock tanking and the recovery under way, Lamar is a perfect takeover target. Yet no one ever talks about buying Lamar. Here is one theory that explains why:

Lamar had between 150,000 and 160,000 billboards before the recession. (My analyst friend estimates the company tore down about 10 percent of those during the recession because they performed too poorly even for Lamar.) In 2010, the company's revenues were just under $1.1 billion. The average site, therefore, earned about $8,000 for the whole year, at best. That's a tiny sum -- many magazines charge that for a single page appearing in just one month's edition.

It gets worse. Lamar has two types of inventory: The new electronic type of billboard you see in Las Vegas or Times Square, and the old-fashioned kind that consists of paper pasted onto a wooden frame. Although Lamar has been installing electronic boards wherever it can, the vast majority of its stock is the old-fashioned kind.

Even if it could get thousands of individual municipal planning permissions to convert the old ones to electronic ones, there just aren't the clients who will pay hefty premiums to be on the boards in rural and suburban areas where relatively few people drive by per month. (Lamar can't get those permissions anyway because towns in America are increasingly aware that the level of "charm" they exude -- historical and natural beauty free from modern commercial clutter -- is related to the health of their local economy.) Thus my analyst concludes:

The small number of digital boards that they've been putting in earn a lot (~$100k per year). But when you strip those out, the analog boards earn on average $5.5k per year (FY 2009).
Figuring that this is a highly skewed log distribution â€"- some of the very good inventory obviously earns much more -â€" The median board probably earns considerably less than that $5.5k number. They tore down ~10% of inventory in 2009 and 2010 that was protected but was never going to earn.
Suddenly, Lamar's laggard revenues and stock make a whole lot of sense. No wonder the billboard giant remains independent.

Lamar's CFO did not immediately return a message seeking comment.

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Image by Flickr user L. Marie, CC.