- Company is on track to growing revenues due to aggressive investments by carriers in network enhancements and expansions.
- Non-cancellable lease contracts with healthy renewal rates strengthen AMT’s future revenue base.
- Acquisitions in emerging international markets will portend well towards growing company’s operations and revenues.
I reiterate my bullish thesis on American Tower Corporation (NYSE:AMT). As telecom and media companies continue to invest in infrastructure, network enhancement and expansion, AMT will benefit from this scenario. Also, AMT's revenue base is secured due to its promising, non-cancellable lease contracts. Moreover, the company is ramping up its merger and acquisition efforts to meet the growth potentials of emerging international markets, which will portend well for its top-line growth in the long run. However, in the near future, the company's plan to acquire BR Towers may put a burden on the company's cash flows. However, AMT's history of generating stable revenues and strong AFFO, signals that cash flows in the long term will remain secure. Moreover, AMT's debt maturity profile ensures that the company's cash flows will not be pressurized due to repayment of debt in the future.
The American Tower Industry is an oligopoly between three dominant players, AMT, Crown Castle (NYSE:CCI) and SBA communications (NASDAQ:SBAC). In the recent past, as the carriers shifted their focus on growing through large scale investments in network expansions to meet the growing demand of data traffic, AMT witnessed an increase in its revenue base, and I believe the trend will continue in the future. The network investments trend from U.S. carriers, AT&T (NYSE:T), Verizon (NYSE:VZ) and T-Mobile (NYSE:TMUS), and from international carriers, Telefonica (NYSE:TEF), Vodafone (NASDAQ:VOD) and Airtel, has been supporting the company's total rental and management revenue growth. In 1Q14, the company's domestic rental and management revenue grew by 23%, whereas the international rental and management revenue increased by 24% YoY.
In addition, the company's revenue base also has the strong backing of non-cancellable lease contracts. AMT has an initial non-cancellable lease term of 5-10 years with its tenants, and lease payments will increase 3%-5% each year. Moreover, due to the fact that the repositioning of site could prove to be expensive and disruptive for the network qualities of carriers, the latter very rarely reposition them away from AMT, which results in high renewal rates for the company. As 70% of AMT's non-cancellable lease contracts are set to renew in 2019 and thereafter, I believe that in the near future, there's no downside risk to the company's revenue base. Furthermore, AMT expects to generate almost $23 billion from its non-cancellable lease contracts in future, which justifies my opinion on the long term security of its revenue position.
In its attempt to increase its international presence, the company is constantly looking for attractive options to invest in emerging markets around the globe. Lately, the company has been targeting Brazil, India and Mexico to enjoy the growth potentials of these emerging markets. The company has announced plans of bidding for the Indian Viom network. If AMT succeeds in the bid, this acquisition will strengthen the company's footprints in India by adding 42,000 towers of Viom to its prevailing 10,000-tower network in India.
Moreover, in a bid to expand in Brazil, the company has recently shown a keen interest in acquiring Brazilian mobile phone infrastructure from BR Towers SA. With the approximate $978 million acquisition of BR Towers, AMT will own 2,530 towers in Brazil. The acquisition may put pressure on the company's cash flows in the short-term. However, in the long run, the company's top-line will largely benefit from this acquisition, as it is expected to add approximately $131 million/year to the overall revenue base and $81 million/year to the gross margins of AMT, which will support its cash flows.
Since the BR Tower acquisition news, there's a lot of speculation in the market about the company's balance sheet strength. I believe AMT has a safe balance sheet. Although, the company's cash flows may get somewhat pressurized in the near term from the Brazilian acquisition, due to the company's ability to generate strong cash flows in the near future, through strong growth-generating investments and expanded operational base, AMT's long-term cash position looks secure. Recently, Fitch has reaffirmed the BBB rating and a stable credit outlook for AMT. In addition, there are no significant debt maturities in the near future that could pressurize cash flows. The following chart shows AMT's debt maturity profile.
(click to enlarge)
Source: Form 10-Q
The company is on track to growing its revenues due to aggressive investments by carriers in network enhancements and expansions, which will in return generate business opportunities for AMT. Moreover, the company's non-cancellable lease contracts with healthy renewal rates strengthen the company's future revenue base. Furthermore, the acquisitions in emerging international markets will also portend well towards growing the company's operations and revenues in the long run. As the company has significant growth potential and AMT is making correct moves to address the growth potential, I remain bullish on the stock.