Analyst Insights

Citi Downgrades Lamar Advertising to Neutral Amid High Valuation Concerns

Citi revises Lamar's price target to $122, citing limited upside potential and premium valuation factors

By Harrison Wall

7/10, 21:05 EDT


Stock Rating: Neutral
Revised Price Target: $122.00
Previous Price Target: Not provided
Stock Price (July 10, 2024): $117.66

Summary Points

  • Citi downgrades Lamar Advertising to Neutral with a $122 target price, citing limited upside due to near all-time high valuation.
  • Lamar's premium valuation vs. Outfront Media is justified by lower transit ad exposure and stronger local ad presence.
  • Potential $1 billion M&A capacity by 2025 is already factored into current valuation, offering limited additional upside.

Valuation Driven Downgrade for Lamar Advertising

Citi's latest equity research report on Lamar Advertising Company (LAMR.O) centers around the company's current valuation, which has reached near all-time highs after an 11% rise year-to-date. The report highlights that Lamar's premium valuation relative to its closest peer, Outfront Media, is justified but leaves limited room for further upside. This assessment comes despite potential incremental M&A activities that Lamar might undertake.

Price Target and Stock Rating Adjustments

Citi has downgraded Lamar from a Buy to a Neutral rating, maintaining the target price at $122. The downgrade is primarily driven by the stock's current valuation, which is seen as fair given the company's growth profile and market conditions. "We see limited upside from prevailing levels," the Citi analyst notes, emphasizing that the stock's premium valuation relative to Outfront is already at the higher end of its historical range.

Premium Valuation and Market Dynamics

Lamar's premium valuation is attributed to its lower exposure to transit advertising compared to Outfront, which has about 25% of its U.S. revenue tied to transit versus Lamar's 7%. This difference has led to a compression in Outfront's multiple, making Lamar more attractive to investors. Additionally, the market's cautious stance on the durability of national ads, which have not fully recovered to pre-COVID levels, further supports Lamar's premium due to its significant local ad exposure. "Investors may be willing to pay a premium multiple for Lamar given its more significant local ad exposure," the report states.

M&A Potential and Financial Metrics

While Lamar has indicated a capacity for approximately $1 billion in M&A by the second half of 2025, the report suggests that even with such acquisitions, the upside is limited. A $1 billion acquisition could add around $32 million in incremental AFFO, translating to $0.31 per share. Applying Lamar's five-year average NTM AFFO multiple of ~14x, this could result in a $4 upside to the $122 target price. However, the report underscores that this potential is already factored into the current valuation, leaving little room for significant multiple expansion.

Valuation Recap and Outlook

Citi's valuation of Lamar applies a ~14x multiple to the 2025 AFFO per share estimate, aligning with the lower end of REIT multiples due to the cyclical nature of ad-based revenues and the company's relatively small real estate holdings. The report also highlights several risks, including economic slowdowns, supply-chain issues affecting digital billboard conversions, and tighter capital markets that could hinder accretive M&A opportunities. Despite these challenges, the report acknowledges that Lamar's current valuation is appropriate given its growth profile and market conditions.

"We believe Lamar’s premium valuation relative to Outfront is justified," the Citi analyst concludes, reinforcing the decision to downgrade the stock to Neutral while maintaining a cautious yet balanced outlook on its future performance.