A new and growing technology could have revolutionary results for the businesses of some advertising companies: digital billboards. For companies that specialize in this type of advertising digital boards have tremendous advantages over static boards, as a company can change what a digital board displays in a matter of minutes which allows advertisers to target their advertisements and pick specific times to display their messages.
How can this feature generate more money? The cool thing about this segmentation is that companies can charge higher rates during peak traffic times. For example, during the morning rush hour these billboards could show ads that cater to clients going to work, and afterward they could change to address other viewers.
What companies could profit from digital billboards?
As a result of decades of consolidation in the advertising industry, just three top players generate about 75% of the billboard revenue in the United States. These companies are Clear Channel Outdoor (NYSE:CCO), Lamar Advertising (NASDAQ:LAMR), and CBS (NASDAQ:VIAC). In order to understand these companies' positioning, let's check out how they have performed and where their businesses are heading.
Leading the midsize markets
Lamar's revenue in the fourth quarter came in flat year-over-year on a pro forma basis at $320.4 million. This result mainly occurred because of weakness in telecom and retail caused primarily by bad weather conditions in the Northeast and slow holiday sales.
Despite the results, some fundamentals work in Lamar's favor. Lamar mostly has billboards in midsize markets where the company is often the only major player. Regulations that limit new billboards back this position, so Lamar holds good pricing power in these markets which helps the company generate impressive profitability. In fact, earnings before interest, taxes, depreciation, and amortization exceeded 40% of the company's sales in each of the past five years. Not bad at all.
Interestingly, Lamar has started the process of converting itself into a real estate investment trust, or REIT. Why? Well, the business structure of a REIT will provide the company with a tax shield, which could be very beneficial.
Based on recent precedent, it is very likely that Lamar will manage to become a REIT as its main obstacle right now is obtaining a private letter ruling from the Internal Revenue Service. This has been obtained in the past in companies like the casino operator Penn National Gaming, for example. Lamar is still waiting, but it's close.
Clear Channel Outdoor also posted flat year-over-year revenue of $2.9 billion in 2013. Nonetheless, revenue from the Americas rose $11 million, or 1%. In regard to the company's digital boards business, it is growing, but this was partially offset by a court ruling that prevented the company from turning on 77 digital boards in Los Angeles. The advertising company currently holds a total of 1,148 digital billboards across 37 U.S. markets and it plans to go for more.
However, Clear Channel Outdoor's financial position depends on its parent company, CC Media, which owns 89% of the company's shares and specializes in radio broadcasting. CC Media holds a heavy debt load as the result of a leveraged buyout and it maintains its operations by having Clear Channel Outdoor lend to CC Media through a $1 billion unsecured revolving promissory note. So, if CC Media became insolvent, Clear Channel Outdoor would be an unsecured creditor with respect to any amounts owed under the promissory note. Unfortunately, this creates risks for the company's minority shareholders, whose fates could be driven by the creditors of CC Media in future years.
Spin off coming up?
Finally, there's CBS, which as you may know heavily involves itself in media production and broadcasting. Well, the company also has a segment called 'Outdoor Americas' that handles billboard and digital advertising, along with transit and street furniture-based advertising.
The company continued to perform well during the fourth quarter despite a drop in political ad spending in comparison with last year. In fact, the company managed to deliver 6% overall growth year-over-year. During 2013, CBS generated $1.8 billion of free cash flow, up 13% from 2012, and it returned $2.5 billion to shareholders via dividends and buybacks. During the first quarter, management plans to complete a $2 billion share repurchase, which includes an $1.5 billion accelerated buyback program. Hence, investors should be pleased.
Regarding the company's outdoor segment, you need to know two important things. First, CBS will use debt financing raised by the outdoor segment to pay for the $2 billion share repurchase. Second, the company plans to spin off this segment in the near future. Hence, even though this is not the most important segment in terms of revenue for CBS -- this division accounted for only 8.5% of the company's total revenue in 2013, or $1.3 billion -- it is profitable and important.
Final Foolish thoughts
The roll-out of digital billboards is a reality and from now on they will become even more widespread. Eventually, we will see audience measurement systems which improve on the basic traffic counts used today, which will result in improved segmentation targeting and more profits for these companies. How? When advertisers can better pinpoint the demographic mix passing their billboards their advertising will become more effective, which will result in higher billboard profitability.
Lamar will continue to enjoy good market share in midsize markets. Plus, once it converts to a REIT structure, the company will save money in taxes and it will also have to pay a dividend of at least 90% of taxable income in the form of a dividend, which will make it even more attractive.
Clear Channel Outdoor and CBS focus on the big cities and usually split the majority of sales from the top 50 markets. In regard to Clear Channel Outdoor, it seems to be coming out ahead in digital technology. However, the company does have debt risk, although right now it is at a manageable level. However, if business slows down the debt could become a bigger concern. Keep watching sales levels.
CBS is using its outdoor segment to finance its share-buying program and it will very likely spin off the segment to create a separate stand-alone, profitable business. In this case, it will be important to evaluate how CBS does this and how the spin-off impacts CBS' stock, as CBS will have to generate cash flow from another source.