Lamar Advertising Company (REIT) is a US$8.2b mid-cap, real estate investment trust (REIT) based in Baton Rouge, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how LAMR’s business operates and also how we should analyse its stock. In this commentary, I'll take you through some of the things I look at when assessing LAMR.

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A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much LAMR actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For LAMR, its FFO of US$565m makes up 53% of its gross profit, which means over a third of its earnings are high-quality and recurring.

LAMR's financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky LAMR is, broadly speaking, to have debt on its books. The metric I'll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 20%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take LAMR 5.11 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.

I also look at LAMR's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 4.35x, it’s safe to say LAMR is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at LAMR's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. LAMR's price-to-FFO is 14.55x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.

Next Steps:

As a REIT, Lamar Advertising Company (REIT) offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in LAMR, I highly recommend taking a look at other aspects of the stock to consider:

1. Future Outlook: What are well-informed industry analysts predicting for LAMR’s future growth? Take a look at our free research report of analyst consensus for LAMR’s outlook.

2. Valuation: What is LAMR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LAMR is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.