Billionaire Steve Cohen’s SAC Has Been Buying Lamar Advertising Co (LAMR)

A 13G filed with the SEC has disclosed that billionaire Steve Cohen’s SAC Capital Advisors owns 4.2 million shares of Lamar Advertising Co (NASDAQ:LAMR), giving the fund a 5.3% stake in the $4.1 billion market cap outdoor advertising company with a primary focus on billboard advertising. We track SAC’s quarterly 13F filings alongside those of hundreds of other hedge funds as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). According to our database, the fund owned 1.8 million shares at the beginning of April (see Cohen’s stock picks over time). Southeastern Asset Management, a mutual fund managed by billionaire Mason Hawkins, reported a position of 4.4 million shares in its 13F for the first quarter of 2013 (find Southeastern’s favorite stocks).

Last quarter Lamar Advertising Co (NASDAQ:LAMR)’s revenues rose 6% compared to the first quarter of 2012, though operating income showed very little change as SGA expenses picked up considerably. Net losses were a little over $6 million, with Q1 generally being poor for Lamar. Trailing earnings are currently very low compared to the company’s market capitalization, and even with Wall Street analysts expecting a large increase in earnings per share over the next year and a half the forward P/E is 45.

The buy case for Lamar Advertising Co (NASDAQ:LAMR) for some time, however, has been the possibility of the company converting to a real estate investment trust. Real estate investment trusts receive favorable tax treatment conditional on distributing a large share of their taxable income to shareholders; as such , the conversion process is more tax efficient and generally also commits companies to pay a decent dividend yield (a factor which is in high demand in the current low interest rate environment). As it happens, an 8-K filed on June 6th by Iron Mountain revealed that the IRS may revise its working definition of “real estate” for the REIT approval process, a move which may signal that the agency will get tougher on prospective applicants such as Lamar seeking to take advantage of REITs’ favorable tax status. The stock price was down 4% as of this writing.

Lamar Advertising Co (NASDAQ:LAMR)’s closest peer is Clear Channel Outdoor Holdings, Inc. (NYSE:CCO), which manages billboards, street furniture displays, and transit advertising displays. This company is actually unprofitable on a trailing basis, with the sell-side expecting net losses this year as well. With revenue flat in the first quarter of 2013 versus a year earlier, we would avoid the stock.

We can also compare Lamar Advertising Co (NASDAQ:LAMR) to CBS Corporation (NYSE:CBS), which has an outdoor advertising business unit, as well as to other marketing companies including direct mailer Valassis Communications, Inc. (NYSE:VCI) and National CineMedia, Inc. (NASDAQ:NCMI). Valassis Communications, Inc. (NYSE:VCI) appears to be in value territory, trading at only 9 times its trailing earnings, though the company has experienced a decline in both revenue and net income. Analysts expect the company to recover, and in fact the five-year PEG ratio is well below 1, but we think that we’d have to see better results first. National CineMedia, Inc. (NASDAQ:NCMI) stands out for paying a dividend yield of over 5%, though with low earnings the company’s valuation multiples look quite high and- particularly with only modest revenue growth at the company- we’d worry that dividends are too high relative to earnings to be sustainable. As for CBS Corporation (NYSE:CBS), the media and entertainment company carries a trailing P/E of 19, reflecting the strength of its industry (its own earnings were up 22% in its most recent quarter compared to the same period in the previous year) and the potential for its own advertising business to spin out as an REIT.

Following Cohen into Lamar Advertising Co (NASDAQ:LAMR) looks quite risky to us. If anything, the company’s fundamentals as it is currently organized suggest a potential short target rather than a long- the earnings multiple is high, yet operating income appears flat. Buying the stock would be speculating on the company receiving REIT status (and achieving very high value creation from that event) and particularly given recent developments that’s not enough of a reason to buy.

Disclosure: I own no shares of any stocks mentioned in this article.