Source: Lamar Advertising
Outdoor advertising has been one of the few traditional media channels that witnessed increased media spending in the past few years, according to Kantar Media.
Between 2008 and 2013, spending on outdoor advertising grew by a five-year compound annual growth rate of 3.4%; media spending for newspapers and network television fell by annualized rates of 7% and 0.3%, respectively, over the same period.
Given that outdoor advertising has stayed in favor with advertisers, should we choose outdoor advertising company Lamar Advertising (LAMR -1.10%) or Clear Channel Outdoor (CCO) to capitalize on the growth prospects of this media channel?
Industry characteristics
Before we even compare these two outdoor advertising companies, it's worth understanding why outdoor advertising is an attractive business for companies like Lamar Advertising and Clear Channel Outdoor in the first place.
Firstly, the outdoor advertising market is regulated and this favors incumbents. Regulations in place at the federal, state, and local levels govern billboard locations. For example, regulations prevent the construction of new billboards in the vicinity of certain buildings or landmarks for safety reasons. Lamar Advertising operates approximately 145,000 billboard displays in 44 U.S. states, Canada, and Puerto Rico, because it has accumulated permits for over 110 years.
A similar story applies for Clear Channel Outdoor which has been in business for roughly the same amount of time and has a 19% market share of the U.S. outdoor advertising market. Lamar Advertising comes in a close second with 18% market share.
Secondly, outdoor advertising gets advertisers the biggest bang for their buck. Its cost per thousand impressions, or CPM, which is the relative cost of reaching 1,000 adults between the ages of 25 and 54, is the lowest among media channels at $3.63. In contrast, the Outdoor Advertising Association estimated CPMs for search sites and network television at $5.00 and $9.50, respectively.
Due to the effectiveness, low cost, and wide reach of outdoor advertising, customers and advertisers that use it are not very price-sensitive. For example, Lamar Advertising's gross margin has been in excess of 60% for the past decade.
Source: Lamar Advertising
Local focus
Comparing Lamar Advertising and Clear Channel Outdoor head-to-head, Lamar Advertising comes out as a clear winner. Clear Channel Outdoor's average gross margin of about 45% pales in comparison to that of Lamar Advertising at 65%.
When it comes to consistent profitability, Lamar Advertising trumps Clear Channel Outdoor there as well. Lamar Advertising has been profitable in eight out of the past 10 years, while Clear Channel Outdoor has suffered losses in five years of the past decade.
The difference between the two companies lies in Lamar Advertising's focus on local advertising; the split between local and national advertising is 80:20 for Lamar Advertising. Due to its focus on small and mid-sized markets, Lamar Advertising claims to be the clear market leader in the vast majority of its markets.
This emphasis on local advertising and smaller markets helps Lamar Advertising in two ways. Firstly, Lamar Advertising has built strong customer relationships because it's much easier to deploy a large on-the-ground sales force in smaller markets.
Secondly, demand for advertising is more stable at the local level, which isn't greatly affected by macro conditions. The results speak for themselves, as Lamar Advertising has been largely shielded from economic downturns. In 1992, 2001, and 2008, its revenue declined by only 2%-3%. The only significant exception was 2009, when Lamar Advertising's revenue fell by 13%.
In contrast, Clear Channel Outdoor tends to dominate in the larger markets, which have more volatile economic conditions and more intense competition between rival media channels.
Financial risk
Even though outdoor advertising is a very attractive sub-segment of the entire advertising market, it's still cyclical and heavily influenced by economic conditions. As such, it's advisable for investors to focus on outdoor advertising companies with fewer financial risks to offset any revenue volatility.
Lamar Advertising has a much stronger balance sheet than Clear Channel Outdoor. Lamar Advertising's total debt as a percentage of market capitalization is approximately 40%; Clear Channel Outdoor's $20.4 billion debt dwarfs its $2.9 billion market capitalization.
In addition, Lamar Advertising has limited refinancing risks with a major refinancing of $200 million only coming due in 2019. In contrast, Clear Channel has debt of $2.4 billion that matures as early as 2016.
Foolish final thoughts
While newspapers and television have seen advertising spend for their mediums decline over the past few years, outdoor advertising has achieved credible growth in the same period that cements its status as a low-cost media channel with wide reach. Among the listed outdoor advertising firms, Lamar Advertising is my top pick because of its focus on local advertising and its lower financial risk.
