>>>Friday afternoon I phoned one of the analysts following LAMR. He
was out of the office, but I spoke with his assistant, who sounded as
though he might have been the one doing the actual work. I introduced
myself as a small, private investor, and told him that Lamar
advertising seemed very overvalued to me, and I was wondering what he
thought. He was kind enough to talk with me for a few minutes.
He felt that LAMR was fairly valued. Not overvalued, not undervalued,
but fairly valued. "But the P/E is 600," I pointed out. "The
Price/book is 24; the Price/sales ratio is over 8.""The analysts
aren't looking at any of that," he answered. "Our consideration is
that cash flow is high."
The company's price/cash flow is around 12.<<<
Charles,
I was a little puzzled by the analyst's comment that p/cf was around
12. Given the huge run up in the stock and the high debt load, I was
sure the number had to be higher. Well it is. I looked at their
recent press release which states Q4 and yearend numbers. Rather than
looking at the full year, I annualized Q4 since the first couple
quarters don't capture more recent acquisitions. While this isn't
perfect (there's some seasonality to the business), it's close enough.
Anyway, here are the numbers:
Recent Price (pre-split) 54.94
(000s)
Mkt Cap 1,725,000
Shs Out 31,399
1997 Q4 Ann
Revenues 57,622 230,488
Direct Exp 17,929 71,716
SG&A 12,733 50,932
D&A 16,252 65,008
OperInc 10,708 42,832
Interest 12,470 49,880
Other (775) (3,100)
Inc Bef Tax (987) (3,948)
Tax 60 240
Net Inc (1,047) (4,188)
Earn/Sh (0.03) (0.13)
EBIT 11,483 45,932
EBITDA 27,735 110,940
MktCap/EBITDA 15.5
Cash Flow
(EBITDA-Int-Taxes) 15,205 60,820
MktCap/Cash Flow 28.4
Comment:
The cashflow measure the analyst is using is EBITDA. On that basis,
the p/cf is about 15. Doesn't sound bad. Problem is, EBITDA is NOT
cash flow.
EBITDA is earnings before interest, taxes, depreciation and
amortization--about $110M. Bankers look at EBITDA because it shows
how much cash a company is generating to cover debt repayment and
interest. That's fine for them because they get paid first. But
stockholders get what's left over after interest and taxes are paid.
You can't just ignore interest taxes! The standard calculation for
cash flow is to add D&A back to net income. For LAMR, interest and
taxes is almost half EBITDA--that leaves cash flow of about $60M.
p/cf is now over 28!
But we're not done. What about capital expenditures? Even in a great
business like outdoor advertising, you still have to maintain/update
your plant, property and equipment. That's why Warren Buffet looks at
free cash flow (cash flow minus maintenance capex) because it shows
what you can take out of the business. LAMR's loan covenants say they
can spend up to 35% of D&A for capex. Let's be generous and assume
that they only spend 25%--$16M. That leaves cash flow of only $49M on
market cap of $1.7 Billion. p/cf is around 35. (again, these are
rough numbers)
A couple more comments:
(1) The last couple years have been kind to the advertising industry.
But in the early nineties during the recession, companies like LAMR
got hammered. If it happens again, the bankers will get their money
back, but there won't be anything left for the stockholders.
(2) The anti-tobacco legislation might ban tobacco ads on billboards.
I don't know what percentage of LAMR's revenues come from tobacco but
I'm sure it's over 5% and probably closer to 10%. Losing that much
business overnight will hurt.
I don't think these risks are fully factored into the stock price (of
course, the same logic could be applied to the whole stock market).
LAMR is seriously overvalued and will be a great short someday when
enough people realize that the sell-side analysts--who, trying to
curry favor with the company in order to get some of the IB business,
peddle ridiculous logic like p/EBITDA--are full of %#$&.
P.S. If CCU (which is even more overvalued than LAMR) buys LAMR, that
will mean that CCU is that much more attractive as a short. The
bigger they are, the harder they fall! |
