American Tower: Leaning Tower of Trouble

Business Model

American tower (AMT) is a wireless infrastructure firm that holds over 22,800 communications sites including towers and antenna systems; over 85 percent of them are in the US and the rest are in Mexico and Brazil. American Tower’s primary business is leasing its antenna space to wireless service companies and radio and TV broadcasting firms, accounting for 98 percent of its revenue.

American Tower operates on long term contractual agreements with wireless carriers, typically 5 to 10 years in length, with 3 to 5 percent annual price increments. The company enjoys generally high lease renewals with low maintenance costs once towers are established, and less incremental costs for accommodating additional tenants.

While the number of wireless subscribers in the United States reached more than 250 million subscriptions, indicating growth has matured tremendously, American tower is focusing its business on emerging markets like Brazil, Mexico and recently, India. American Tower has strategically placed itself to address the growing demand for additional bandwidth due to increasing subscription for smart phones.

Though American Tower is strategically well-positioned both in the US and in emerging markets, the financial numbers and valuations have climbed well beyond justified market expectations. Those analyzing American Tower as a growth machine are wrong to continue to do so, as the wireless segment has reached its peak, with most American families owning two or more cell phones. As the overall economy looks sluggish and unemployment looks set to continue rising into the next year, how many people are really going to buy flashy smart phones with an extra 40 dollars per month in data plans?

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As tabulated in the financial highlights section, American Tower appears to be in a cash squeeze. Its current ratio is less than one and interest coverage is less than 2. Sales appear to be growing in recent days, however watch the trend in the account receivables section. For the past one and half years, sales growth has come in at 11% while accounts receivable has been growing at a rate four times higher than sales.

High Valuation

American Tower is trading at 75 times earnings and four times book value based on trailing twelve-month data. However, tangible book value is deep in the red since 2007.

While the company issued half a billion dollars in debt at 7 percent in October 2007, it purchased its own shares at the same time, returning just 2 percent on equity in 2007. With 1.6 times debt to equity, American Tower appears to be entering risky territory.

References: 10K, 10Q data from EDGAR, Securities and Exchange Commission.

Disclosure: Long Puts on American Tower.

Year-End Disclosure

During this tough year, how have my recommendations on Seeking Alpha fared?

I closed my short position in Arbitron (ARB) since price valuations got healthier.

Comments

[Ricard:]

I remember looking at AMT and CCI a while back. CCI for one has yet to make a profit, but that didn't affect its stock price one bit. My guess would be that this particular segment of tech still retains the growth story from 2003 - high fixed costs, very, very low variable costs - so the challenge would be to find more ways to exploit those antennas. Enter the IPhone - I believe it's going to be the first in many devices that will truly bring mobile computing to the forefront - along with mobile internet connections utilizing wireless networks. I'm no tech geek, but if those antennas are broadcasting a wi-fi signal, I'd say the future looks rather bright for these companies.

2008 Dec 23 01:32 PM

[Cyrus6789:]

AMT is valued on a cash flow basis and is trading below present value of cash flow...so have fun with those puts.

2008 Dec 23 06:28 PM

[Cyrus6789:]

AMT is valued on a cash flow basis and is trading below present value of cash flows...so have fun with those puts.

2008 Dec 23 06:31 PM

[afx:]

Looks like a/r increase is a seasonal issue as same thing happened q3 last year and relative to revenues, was smaller this year. Still free cash flow positive. The issue here would be options/stock buybacks.

2008 Dec 24 09:38 AM

[10Q Detective:]

The majority of AMT's debt does come come due til at least 2012:
blogs.bnet.com/secdocu...

Jan 03 10:56 PM

[Charlie Bottle:]

Sreeni, good article.

I agree these tower plays are extremly overvalued, no matter how you look at it (including cashflow) and bound for a correction. AMT's competitor (see my article seekingalpha.com/artic...) is more vulnerable because it trades at even higher multiples, itis more levered and has shorter term maturities on its debt.

Feb 16 06:38 PM

[AMT-Man:]

Ricard is right, .everyone knows AMT is the premier leader in this industry and as more and more people get onto data plans an demand more bandwidth, the need for tower space will only grow. Is there a downfall for AMT? sure, but not for another 40, 50 years. Satellite phones are too expensive to be widespread among the general population, and there is no need to make that technology cheaper, because carriers will use what is already working...well...RF frequency.

Feb 20 12:01 AM