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Does David Abrams Think Lamar Advertising is Overpriced Now?

Abrams Capital Management, run by ex-Baupost Group employee David Abrams, owns over 10% of the outstanding shares of Lamar Advertising Co (NASDAQ:LAMR) and so must file with the SEC when it makes large changes to its position. On August 31st and September 4th, the fund sold a total of about 100,000 shares at an average price of $33.27. This still left Abrams with over 8 million shares of the stock however, combined with the fund’s sale of about 560,000 shares that it reported in a separate filing earlier in August, it appears that this major owner of the stock is getting increasingly wary of the stock’s rising price. Lamar, which according to 13F filings for the second quarter is Abrams Capital Management’s largest position (find more stocks owned by Abrams Capital Management), has risen 67% over the last year including over 15% in 2012. The fund may be locking in its gains on the stock, but it may also think that the increase in price has outpaced the company’s business. Abrams opened the year with 9.3 million shares of Lamar in its portfolio, so in total it has cut its stake by about 14% this year.

David Abrams

It’s certainly easy to make a case for Lamar Advertising Co being overpriced. The stock trades at 55 times forward earnings estimates for 2013, which seems high for a company whose primary product line is billboard advertising (Lamar also operates logo and transit advertising displays). It is highly exposed to the broader market with a beta of 2.5, and has a fairly low cash balance compared to its $2.2 billion in debt and $3 billion market capitalization. Revenue grew 4% in Lamar’s last quarter compared to the second quarter of 2011, bringing the company’s revenue growth for the first half of 2012 to 4% compared to the same period in the previous year. EPS for the second quarter were 15 cents, compared to 12 cents a year ago, but the company was unprofitable for the first half of the year due to high costs in Q1.

Other large funds are also significant investors in Lamar Advertising. It is one of the top ten positions in SPO Advisory Corp’s portfolio, according to its 13F. SPO Advisory is managed by John Scully and is heavily invested in services stocks (see which ones as well as other stocks that SPO Advisory Corp likes). Southeastern Asset Management reported a position of 7.2 million shares of Lamar at the end of June, unchanged compared to the previous quarter (research more stock picks from Mason Hawkins).

Lamar Advertising Co’s two primary competitors are Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) and CBS Outdoor, a business unit of CBS Corporation (NYSE:CBS). Given CBS’s television operations we’d consider Clear Channel Outdoor Holdings to be the company’s closest peer. Clear Channel, in contrast to Lamar, has dropped 52% over the last year and is expected to be unprofitable for 2012 and 2013 as well. Its revenue has been slipping as well. CBS trades at 16 times trailing earnings and 13 times forward earnings estimates, but much of this is likely due to the advertising platforms provided by its popular television programming. To see if Lamar is overpriced, it might also be wise to compare it to other services companies with a market cap of about $3 billion and trading at a forward P/E of close to 55. Netflix (NASDAQ:NFLX) and Teekay (NYSE:TK) meet these criteria. Netflix has lost about three-quarters of its value over the last year as investors have concluded that the costs of acquiring new content, as well as competition from Amazon and other service providers, outweigh the broader market opportunity. Teekay, a shipper of oil and gas, has turned in negative earnings the last two quarters.

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