Crown Castle International (CCI) operates in the wireless infrastructure sector, mostly in the U.S. and Australia. In 2007, CCI and Global Signal merged, resulting in a 75% increase in sales. As such, any analysis of this company should take 2007 as the starting point.
CCI has seen an annual 10% rise in sales since the merger, which is a reflection of the fast expansion in the mobile phones and wireless sector. The present run to 4G technology has given new momentum to this sector, but we must remember that all the major telecommunications providers already have their net in place, and this new system will use some of the old equipment. This means that wireless infrastructure providers like CCI will see a gradual increase in demand rather than a boom in demand.
Our customers have introduced, and we believe they plan to continue to deploy, next generation wireless technologies, including 3G and 4G, in response to consumer demand for high speed networks. We expect these next generation technologies and others, including LTE, HSPA+ and WiMAX, to translate into additional demand for wireless infrastructure, although the timing and rate of this growth is difficult to predict.
CCI's costumers can be seen as stable and reliable due to their dimension and regular cash flow:
In the U.S., our four largest customers (Verizon Wireless, AT&T, Sprint Nextel and T-Mobile) accounted for an aggregate 80% and 74% of our 2011 CCUSA and consolidated revenues, respectively. In Australia, our customers include Telstra, Optus and a joint venture between Vodafone and Hutchison (VHA).
Looking at CCI's balance sheet, we clearly see this is a company based on growth in order to sustain high market value. With a debt ratio of 74% and an average interest rate of 6.40% it desperately needs to keep increasing sales to meet shareholders expectations.
I should also notice that the company's residual value is negative, which does not bring any comfort to long-term investors.
Sales increased at 10% growth rate since the merger in 2007, the operating margin jumped from 12% in 2007 to 35% in 2011 presenting a great operational efficiency. But there is a problem, the gigantic amount of debt has to be paid and in the last five years interest expenses consumed around 25% of revenues, decreasing their profitability.
CCI US EQUITY
Total Debt *
Total Assets *
Debt Ratio *
Net Income *
Mkt Cap *
52 Week High
52 Week Low
Volume (average 30 days)
* Source: Bloomberg
Now let's make a simulation where CCI will increase sales in next five years and then stabilize its activity maintaining sales and profitability. Parameters:
11% growth rate on sales, which is the maximum verified on the last five years. Net income will be 10% of revenues; this value is based on analysts' estimation for 2012.
The result is clear, even in this optimistic simulation the actual PER (price to earnings ratio) would be 44, which is another signal that CCI is too expensive and too risky.
The price target is $13.65 or $400 Million of Market Cap, which represents a PER of 20 assuming CCI will be able to keep last year net income.
In short, operationally is a well managed company, but the giant amount of debt and the enormous PER makes this company attractive for a short position.