Advertising was one of the biggest turnaround stories following the market bottom of 2009. High profile segments of the ad market are still doing OK, and digital behemoths Google and Facebook are raking in the advertising dollars. Meanwhile, out-of-home advertising is getting pounded this year. If the market continues to weaken, this last group would be the first to lose ad dollars.

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Digital Taking Traditional Ad Dollars
The out-of-home advertising space is a lower profile advertising medium. The non-digital component of the out-of-home network is part of the traditional advertising model that includes television, radio and print. Companies like Lamar Advertising Company (Nasdaq:LAMR) operate outdoor billboards, transit advertising, and highway logo signs. Lamar competes with Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) and CBS Outdoor, a division of CBS Corporation (NYSE:CBS).

Aside from low growth prospects in developed markets, the biggest threat to legacy advertising outlets is the transition online. Digital is the fastest growing segment of the advertising market. BIA/Kelsey reports that small and medium-sized U.S. businesses will spend 70% of their marketing budgets on digital advertising, performance and retention solutions by 2015. That's up from 48% in 2010. Of course, a part of that 70% will be out-of-home digital display. But the vast majority will likely be directed to search portals and social media sites Google, Yahoo and Facebook. Also, digital represents a low percentage of the business for most out-of-home network operators. At Lamar, digital is just 13% of their book.

Winners and Losers
Outdoor advertising stocks will probably continue to struggle through the second half of the year. Last year, out-of-home advertising network operators posted gains of 25% and more. 2011 has been a different story. Year-to-date, shares of Lamar and Clear Channel Outdoor are down 52 and 21%, respectively. This month alone, Lamar is off 8% and Clear Channel is down 3%. Both have touched their 52-week low within the past five weeks.

Only China-based Focus Media Holding Limited (Nasdaq:FMCN) has managed to buck the downtrend. Focus runs digital signs on highways and displays in stores, hotels, restaurants and buildings. Focus recorded a stellar 13.1% year-over-year increase in revenues during the second quarter, capturing ad dollars within the exploding Chinese economy. The implementation of Location Based Service interactive advertising technology is another growth driver that may propel shares of Focus even further.

The Bottom Line
Focus appears to be the exception rather than a harbinger of a rebound in out-of-home network advertisement. Lamar's decision to guide revenues lower for the third quarter reflects growing uncertainty in the market. Weak rate and occupancy statistics suggest a very difficult environment for these advertisement networks to control pricing. If investors do choose to play ad stocks, there may be a preference for diversified advertising and marketing service providers like Interpublic Group of Companies, Inc. (NYSE:IPG) and Omnicrom Group Inc. (NYSE:OMC) who offer solid yields. Lamar, Clear Channel and Focus pay no dividend. Be careful in the advertising space, particularly in the out-of-home network. (For additional reading, take a look at The Impact Of Recession On Businesses.)

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