Is it time to get out of American Tower? Today's action suggests many are doing so, despite the a bull market which continues to stampede ahead. The Dow Jones Industrial Average ETF (DIA) and the SPDR S&P500 ETF (SPY) are up 18.7% and 18.5%, respectively. Those are some hefty gains. However, in a market there are always winners and losers. One of the keys to investing profitably is finding potential winners disguised as losers. These stocks may often be ones that drop viciously down to near 52-week lows on seemingly bad news or poor market conditions. In fact, it is sometimes baffling to be a shareholder and watch how quickly a company can go from all-time highs to bumping along near a 52-week low. One stock that has been beaten down on rumors and bad press, and just reported a so-so transitional quarter that is causing investors to abandon ship today is American Tower (AMT). Unlike those jumping ship today after earnings, I believe AMT has intermediate upside in the next year and is on a path to long-term growth. At the time of this writing, AMT is trading at $69.75 on high volume. In this article, I will discuss what has knocked the stock down, the implications of the earnings reports, and why the stock is a good buy at its current sub $70.00 price.
What Does American Tower Do?
For those readers unfamiliar with the stock, AMT is a cellular tower operator. AMT has rental and management operations that include leasing antenna space on multi-tenant communications sites to wireless service providers, radio and television broadcast companies, wireless data providers, government agencies and municipalities, and tenants in various other industries. AMT also manages rooftop and tower sites for property owners, operates distributed antenna system networks and managing lease property interests under carrier or other third-party communications sites.
The selloff in the stock began with critical research report and disclosure from Muddy Waters, an infamous firm that frequently shorts stocks. In the report, the firm alleges that AMT fraudulently reported its actual purchase price of some wireless towers in Brazil, and questions recent insider sales by directors of the company. This sent the stock down several points and continues to loom largely over investors. In total, AMT could be looking at a $1 billion impairment. Analysts questioned the Muddy Waters allegations about American Tower's accounting, and suggested the research firm had overplayed its concerns about the sector. Morningstar Inc. analyst Imari Love said:
"The piece seems filled with unfounded assertions, factually incorrect data and conjecture"
AMT has responded to the allegations in a recent SEC filing. AMT rebutted the most serious accusations, that it had misreported the price of a Brazilian tower acquisition. In the SEC filing we learn:
"The Company completed the acquisition of a privately-held, independently operated tower company in Brazil, which included the purchase of 666 communications sites during the year ended December 31, 2011 for an aggregate purchase price of approximately BRL 974 million, or approximately $585 million. To fund the acquisition, the Company's Brazilian subsidiary, ATC do Brasil - Cessao de Infra-Estruturas Ltda., utilized cash on hand from a combination of intercompany loans and equity contributions from its parent, and cash from operations. The intercompany loans of BRL 554 million, or approximately $335 million are registered with the Central Bank of Brazil. In addition, the Company utilized equity contributions of BRL 303 million, or approximately $184 million which are also registered with the Central Bank of Brazil. The remainder of the aggregate purchase price was cash from operations. The Company received documentation confirming the full payment of these funds to the seller."
While there are other aspects of the report that will remain in question, suffice it to say that the most serious allegations appear untrue. The damage was done to the stock, hitting it for 5% right away.
Today's (7/31) Earnings Release
Earnings in the most recent quarter were pressured, but AMT is still the most financially sound among its competitors and essentially the only tower company capable of turning a regular profit. Overall, the quarter was decent, but the company did miss on earnings and sales. In Q2 2013, net income of $99.8 million or 25 cents per share more than doubled from $48.2 million or 12 cents per share in the prior-year quarter. However, it missed estimates of 53 cents. Total revenue of $808.8 million increased 15.9% year over year, but was also slightly below estimates of $817 million. This news pressured the stock another 3.2% today (7/31). Despite the year over year growth, the quarter did not meet expectations. However, there are more positives when we dig deeper, that suggest AMT is a good buy.
Total rental and management gross margin increased 14.2% to $594.8 million. Further adjusted EBITDA increased 12.5% to $524.0 million, core growth in adjusted EBITDA was 14.7%, and adjusted EBITDA margin was 65%. These numbers are quite strong. Adjusted funds from operations also increased by 19.5% to $366 million. One key fact in the report was guidance, where AMT reaffirmed the midpoint of its full year 2013 outlook for total rental and management revenue and increased the midpoint of its full year 2013 outlook for adjusted EBITDA by $5 million and adjusted funds from operation by $10 million. Thus, while on the surface headlines the report was poor, and investors jumped ship, the quarter was actually pretty good.
I think it is worth mentioning that AMT is now also classified as a real estate investment trust, allowing it to take advantage of the many tax benefits afforded to REITs. To remain as a REIT, shareholders have to receive 90% of more of the company's profits in the form of a dividend. I like the REIT classification, because as a shareholder, you are not only exposed to growth, but also will get paid to hold the stock. Right now the yield is only 1.56% based on the last quarterly dividend of $0.27., but with potential earnings growth ahead, the dividend could rise as well.
Key Driver of Future Growth
One key point for the future of AMT which is why I believe the stock is a good bet from its near 52-week low here is that the company is currently undergoing a period of intense consolidation and 4G LTE infrastructure build-outs. This is critical because in an era of expanding smart phone use that requires more data and more bandwidth (figure 1), the demand for antenna space should soon rise, possibly sharply, As such, AMT is set to benefit tremendously from this expansion and growing demand.
Figure 1. Wireless Industry Trends For The Last Decade Depicting Evolution From 2G-4G And Associated Carrier CAPEX.
We know that AMT is directly connected to the mobile telecommunications sector which is a very competitive market with all of the carriers, manufacturers, and developers battling for market share. However, I believe that AMT will dominate regardless of who the current leader is, and in fact it likely benefits from added competition. Why? Well, since AMT is a tower owner and operator, it makes money from almost every single mobile customer. Its only competition is with other tower-based companies, none of which are as strong as AMT. Therefore, its growth is pegged to the growth of the industry, which is of course very strong. This is especially true in some emerging markets such as India and Brazil, where AMT is quickly expanding. Although the recent quarter was worse than expected and Muddy Waters tries to make a case against the company, I think it's a good buy at current levels due to upcoming growth catalysts.
While investors are abandoning ship over the last two weeks, I believe there is opportunity to pick up some shares of this quality company. The most damaging accusation in Muddy Water's report was unfounded and the most recent quarter when we look under the hood was rather strong. Combine this with the future growth opportunities and the fact that AMT benefits from competition given its business model, I think there is a favorable risk-reward ratio with this stock. Under $70.00 this stock is a strong buy.