Look up! Big bucks in billboards
Traditional forms of media like TV, radio and newspapers are getting hurt by the Internet. But the outdoor advertising industry is thriving.
By Paul R. La Monica, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - Forget about Google and Yahoo! One of the hottest areas of the advertising market these days is about as far away from the glamour of the Internet as you can get: billboards.

Yup, good old-fashioned outdoor advertising has made a big comeback.

Signs, signs, everywhere there's signs. Outdoor advertising has enjoyed a comeback even as other traditional media companies struggle to attract marketers.
Signs, signs, everywhere there's signs. Outdoor advertising has enjoyed a comeback even as other traditional media companies struggle to attract marketers.
Outdoor outperforms: Shares of Clear Channel Outdoor and Lamar Advertising have surged during the past few months.
Outdoor outperforms: Shares of Clear Channel Outdoor and Lamar Advertising have surged during the past few months.
Sharp "Focus": Chinese electronic display advertising company Focus Media has been a huge hit with American invesfors since the company went public last year.
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Advertising revenue for the outdoor category, which includes billboards as well as ads on bus stops, train stations and other public places, were up more than 8 percent last year according to research from the trade group Outdoor Association of America (OAAA). That outpaced the growth rates of other traditional forms of media such as network TV, radio and newspapers.

The OAAA is forecasting similarly healthy increases in 2006. And investors have taken notice.

Radio operator Clear Channel Communications (Research) spun off its billboard operations, Clear Channel Outdoor (Research), last November and the stock is up nearly 30 percent since the IPO. During the same time frame, shares of Lamar Advertising (Research), the third-largest billboard operator in the U.S., are up more than 15 percent.

"Outdoor represents the only area of established media that is still seeing strong growth," said Fred Moran, an analyst with Stanford Group.

What's behind this healthy performance? And more importantly for investors, can these stocks continue to sizzle?

Billboards meet the 21st century

Industry insiders and analysts say there are several good reasons why an outdoor ad renaissance could just be beginning.

For one, billboards, unlike other "older" forms of media, have not faced the same pressure from the Internet, iPods, satellite radio, TiVo and other technology. When you're driving on a highway, the only way to not see a billboard is to not look out your windshield. Needless to say, that's not a good idea.

"Technology helps people avoid other advertisements, but we are the one unavoidable media. There is no mute button, no off switch. You can't change the channel. We're there," said Paul Meyer, the global president of Clear Channel Outdoor.

In fact, technology is actually something that could help Clear Channel Outdoor and Lamar in the near future. Both companies are testing digital billboards, LCD screens that can change advertisements instantaneously through Internet connections.

That's a far cry from the old vinyl billboards that only get changed every couple of weeks (or sometime months).

"For our industry, technology is no longer a threat, it's just an ally. Digital displays eliminate the biggest disadvantage to outdoor right now, which is that we are a relatively slower acting cumbersome media," Meyer said. "With digital signage, there will be no limitations on how often and when advertisers change their ads."

Kit Spring, an analyst with Stifel Nicolaus, said investors realize that digital billboards could lead to even bigger sales gains going forward, since the outdoor companies will be able to charge more premium rates for a digital sign. In addition, he said that the lower cost to maintain these billboards -- billboard operators won't need to have people climb up and manually change the advertisements on a regular basis -- could lead to higher profit margins.

"Revenues should be higher from digital billboards and, after the cost of deploying them, costs should decrease over the next few years. So the billboard companies should get a very attractive return on investment," Spring said.

Spring added that investors are probably noticing how well a company called Focus Media (Research), which offers electronic display advertising in China, is doing and factoring that into their expectations for Lamar and Clear Channel Outdoor.

Focus Media's sales more than doubled in 2005 and the stock, which went public on the Nasdaq in July, has surged nearly 240 percent from its offering price.

Auto industry woes not a concern

But even with digital billboards looming on the horizon, outdoor advertising is still expected to remain a relatively cost-effective way for marketers to reach a large audience of people. It's certainly cheaper than major TV or print ads.

For this reason, outdoor is expected to remain attractive to advertisers, even for companies in struggling industries such as the automotive sector.

What's more, as the Internet becomes a more important promotional tool for car companies, Stuart Kagel, an analyst with Janco Partners, said that billboards can serve as relatively inexpensive ways for auto companies and local dealers to drive traffic (pardon the pun) to their Web sites.

"GM has pared back advertising but what's going to go on is that you will see auto industry go to lower cost solutions like billboards," said Kagel. "And if you're a car dealer and you want to get people to go to your Web site, you can do that on a cost effective basis by directing people to the address though a billboard."

But what about the stocks? Clear Channel Outdoor and Lamar each trade at some heady valuations. Clear Channel Outdoor has a P/E of more than 60 times 2006 profit projections while Lamar is valued at more than 90 times this year's earnings estimates.

Analysts say, however, that a better way to judge the valuations of these two companies is by looking at multiples based on earnings before interest, taxes, amortization and depreciation (a measure of profitability commonly used for media firms...and apparently the carting industry as well, according to Paulie Walnuts from "The Sopranos.")

On this basis, Clear Channel Outdoor trades at a multiple of about 10 and EBITDA is expected to increase in the low double digits in percentage this year and next. Lamar trades at about 11 times EBITDA estimates for 2006 and analysts are forecasting EBITDA growth of 9 percent for 2006 and 2007.

Moran thinks these valuations are reasonable, especially since Lamar and Clear Channel Outdoor are both expected to post revenue gains of about 7 percent this year, sales growth that outshines the expected annual increases of between 2 percent and 4 percent for most radio companies this year.

"Lesser growing companies are also trading at double digit multiples and clearly don't have the outstanding potential that the outdoor sector does," said Moran.


Google is back above $400. For more, click here.

CBS also has a large outdoor ad business. Click here.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies. Top of page

Clear Channel Communications Incorporated
Lamar Advertising Company
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