Moody’s has given outdoor firm Lamar a corporate family rating of Ba3 based on its strong presence in a high-margin business and its steadily decreasing leverage. And it sees upside as the company converts more spaces to digital.
According to the analysts at Moody’s, Lamar has decreased leverage from 6.2x at the end of 2009, to 5.6x at the end of 2010, and then to 5.0x heading into the current year. It believes modest EBITDA growth in 2012 will help continue the downward leverage trend.
Converting to digital is not without risk, according to Moody’s. It stated, “The ability to transfer traditional static billboards to digital also provide growth opportunities to the company, although the transitional to digital will make the company more sensitive to short term changes in advertising demand. This will lead to more volatility in earnings than historically when its assets were more traditional billboards that are subject to longer term contracts. Compared to other traditional media outlets, the outdoor advertising industry is not likely to suffer from disintermediation and benefits from restrictions on the supply of billboards that help support advertising rates and asset valuations.”
There are other things to like. “As a pure play outdoor advertising company, Lamar provides mainly local advertising and derives revenues from a diversified customer base, with no single advertiser accounting for more than 1% of the company’s billboard advertising revenue,” Moody’s explained. “The high local advertiser exposure means that the business is subject to above average movements in revenue when the occasional consumer-led downturn in the economy occurs which constrains the ratings as long as the company maintains high leverage levels. However, Lamar’s EBITDA margin of over 40% (excluding Moody’s standard adjustments) and relatively low proportion of maintenance capex as compared to total capex, which includes growth and digital investment opportunities, provide sufficient headroom to weather cyclical setbacks and positions the company strongly relative to industry peers to maintain its credit profile within the Ba rating category.”
Moody’s said that it will be in line for another upgrade if it can get its leverage down to 4.5x.