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American Tower Corp. (NYSE:AMT) continues its strong performance, driven by a substantial demand for tower space to facilitate high-speed wireless data and video services, together with emerging 4G technologies.

Despite this, the recent Zacks Consensus Estimate revision trend is quite disappointing for the company. We believe this negative trend can be attributed to valuation.

Second Quarter 2010 Highlights
Quarterly earnings per share (EPS) of 25 cents were well above the Zacks Consensus Estimate of 20 cents. Total revenue of $469.9 million increased 11.0% year over year and was also above the Zacks Consensus Estimate of $464 million. This solid performance was driven by healthy growth of the company’s core Rental and Management business segment.

American Tower maintains one of the strongest EBITDA margins in the industry, which was 68% for the most recent quarter, well above its peers. In the same quarter, new business lease contract was up 10% year over year and existing business lease contract was up 25%. Management provided a rosy financial outlook for 2010. Revenues are expected to rise around 10.6% year over year and cash flow from operations will likely grow around 14%.

Agreements of Analysts
Of the 17 analysts covering the stock, only 1 of them revised the estimate upward in the last 30 days for the ensuing third quarter, but 5 revised downward. For the following quarter, three analysts revised their estimates upward while 5 moved in the other direction.

However, nine analysts raised their estimates for both fiscal 2010 and 2011 during the same time period, while 3 analysts reduced their estimates for fiscal 2010 and 2 analysts reduced it for fiscal 2011.

According to our view, the negative sentiment mainly comes from the current high market valuation of the stock. American Tower is currently trading at the high-end of its 52-week price range. The stock price moved up nearly 48% in the last year.

At this current valuation, American Tower is trading significantly above the industry average and the S&P 500 average with respect to several valuation metrics. Most of the analysts have opined that the stock has virtually no potential for above market gain in the near term.

Currently, the Zacks Consensus Estimate for the third quarter is 20 cents, which would result in substantial growth of nearly 19.4% year over year. Similarly, for fiscal 2010, the current Zacks Consensus Estimate of 89 cents is also indicating a whopping gain of more than 50.5% year over year.

Magnitude of Estimate Revisions
In synergy with the negative estimate revision trend, the Zacks Consensus Estimate has moved down by 2 cents in the last 30 days for the third quarter, and has also moved lower by 1 cent for the following quarter. For fiscal 2010, the Zacks Consensus Estimate moved lower by 2 cents in the last 30 days, whereas the Zacks Consensus Estimate for fiscal 2011 moved up by 4 cents during the same time period.

Earnings Surprises
With respect to earnings surprises, the company’s fairly good track record is not expected to persist in the coming quarters. American Tower produced an impressive average earnings surprise of 15.74% in the last four quarters. Currently, the Zacks Consensus Estimate for the ongoing second quarter contains a 10% downside potential (essentially a proxy for future earnings surprises). Similarly for fiscal 2010, the current downside potential is 1.12%.

Our Recommendation
Our long-term view regarding the tower industry is positive, supported by a spurt of demand for high-end smartphones throughout the world. American Tower generates most of its revenue from long-term (typically 5-10 year) tower leases with major wireless carriers. The revenue generated from leasing and management of such networks is impressive and over 95% is recurring in nature. The company has more than $9 billion worth of lease backlog that cannot be cancelled.

We thus maintain our long-term Neutral recommendation for American Tower. Currently, it is a short-term Zacks #3 Rank ('Hold') stock.

Source: Earnings Scorecard: American Tower