When we mention the retro corporate moniker “American Tower” (AMT) to you, try not to think of stubby galvanized-steel structures.
Instead, think of 4G service spreading across the U.S. in coming years. And think of how much additional equipment wireless carriers are going to need to bolt onto cell towers in order to provide the super-high-speed mobile broadband and video-on-demand capacity that they’re so glibly promising smart phone customers these days.
American Tower owns wireless communications towers, tens of thousands of them, and it rents space on them to wireless biggies like AT&T (T), Sprint Nextel (S), Verizon (VZ) and Deutsche Telecom’s T-Mobile unit. Business, as you can imagine, is booming, and American Tower shares have set record highs recently.
American Tower’s shares have outperformed the company’s two smaller rivals, as well as the S&P.
In part, that’s because site matters. Rival carriers often rent space on the same tower as they seek to optimize local coverage, and American, thanks to favorable locations, draws significantly higher revenue per tower. Its gross margins show the payoff:
Although the tower sector has generated a lot of investor enthusiasm, the business itself isn’t terribly volatile or complex. Principal costs include either building or acquiring towers, and paying rent on the ground underneath. Revenue comes from the rents carriers pay on long-term leases to place transmitting equipment the towers.
What has changed, and is fueling renewed interest in the sector, is the expectation that the rollout of mobile broadband is about to spur growth more rapidly than previously expected. In many locales, carriers upgrading to 4G and other high-density formats will most likely just clamp additional equipment onto the existing towers they already rent. That will boost tower operators’ revenues without generating any significant additional costs, fattening long-term margins.
Revenues are already growing smartly, although net income, (affected by depreciation charges that squeeze bottom-line performance but tend to shield cash) has been a bit more restrained.
Even as American Towers churns out free cash, interest costs as a percentage of gross income have declined as the Boston company refinances older obligations with cheap new debt.
These days, American Tower is using a lot of that cash to go shopping, mostly in the high-growth emerging markets of India, Latin America and Africa. Here’s a look at how the company’s capital outlays as a percentage of gross income compare, over the past year, with high-tech icon Intel (INTC) and old-line manufacturer 3M (MMM).
With rising earnings and long-term trends that promise hefty industry growth in the decade ahead, what’s not to like about American Tower?
YCharts Pro says it’s slightly overpriced. Lack of a dividend is one problem, but so is the fact that many investors have already decided the stock offers a good way to ride the next wave of wireless-infrastructure growth. American’s multiple based on trailing twelve months GAAP earns is indeed a whopper.
And while return on assets has risen in recent years, so has leverage.
Harder to quantify is its exposure to consolidation. A merger among two wireless providers — say, a hypothetical combination of ATT&T and T-Mobile — could badly dent American Tower by reducing demand for tower space. So would an unforeseen plunge in one carrier’s spending.
YCharts can’t help us weigh those possibilities, nor can it measure the higher risks that accompany the company’s ambitious offshore strategy. But it does signal us that this stock’s price is fundamentally too high.
Disclosure: No position