Shares of Crown Castle International Corp. (CCI) have had a dream run since the start of the year, gaining almost 45%. The surge has been triggered by its most recent quarterly results, which show solid growth in revenues from its site rental business. Even more impressive is the 57% growth in revenues from its network services. Overall, the company reported results and metrics that beat analyst expectations. Crown Castle owns, operates, and leases wireless infrastructure, which includes towers and distributed antenna systems. The company's core business is renting space on its towers, which provides the majority of its revenues. In the quarter ended June 2012, the company's site rental business generated almost 90% of its revenues, while the rest came from its network business, which provides installation and site development services.
The company is experiencing staggering growth in revenues, as more and more people are using their phones for purposes other than just talking. As more consumers surf the Internet and download videos and other data on the go, coverage and capacity challenges arise for networks. That's where CCI comes in, with its wireless infrastructure and its coverage in almost 92 U.S. markets. Tower companies have benefited from rising cellular traffic led by data demand. As telecom operators upgrade their networks to accommodate increased traffic, tower companies like American Tower (AMT) and CCI stand to gain. A positive development for the company was when it recently reached an agreement with T-Mobile to extend the remaining term on over 7,000 leases to 10 years. This renewed agreement will result in a revenue boost of approximately $20 million in site rental revenues in the second half of the year.
CCI is a growth story, with consistent growth in revenues. Quarterly revenue growth is 17%, while CCI's earnings jumped by almost 300% in Q2 2012. This growth can be expected to continue in the second half of the year due to the T-Mobile lease agreement. Site rental revenues, which are recurrent in nature, have also increased consistently over the years, with growth improving every quarter. As impressive as the company's growth is, the major risk that tower companies like CCI face is possible consolidation between telecom operators. Crown Castle generates over 70% of its revenues from four major carriers in the U.S., namely Verizon (VZ), AT&T (T), Sprint (S), and T-Mobile. In the case of any consolidation, CCI's revenue stream will most likely be disturbed. Recently, there have been talks about Sprint's possible acquisition of T-Mobile Communications to gain access to more airwaves. In such a scenario, tower companies will likely be adversely affected as the consolidation suggests decommissioning of towers. However, CCI's recent lease agreement with T-Mobile to extend its lease terms to 10 years implies that a consolidation will not have a significant impact.
It seems as if the tower companies in the U.S. are seriously thinking of reorganization, as is evident in American Tower's recently acquired REIT status. The company will now distribute 90% of its taxable income to its shareholders and will be subject to lower taxes. After a solid share performance by AMT, other tower companies may also follow suit. It is already being speculated that CCI may be aiming for REIT status to save up on taxes, after it started to include the funds from operations figure in its quarterly results. FFOs are usually associated as a key financial metric in the REIT Industry.
The stock is trading at EV/EBITDA of 18 times, as compared to 21 times for American Tower. On a P/S basis, the stock looks cheaper as well, with a multiple of 9 times as compared to AMT'S 10 times. We are bullish on Crown Castle based on its better-than-expected quarterly results and the overall improvement in all key metrics. Its site rental business has continued to grow, and the recent T-Mobile deal is expected to be the catalyst for further growth. Moreover, wireless infrastructure upgrades by telecom operators and increased data demand from wireless customers will be beneficial for the company. Potential REIT conversion can also make the stock attractive for investors seeking dividend income. The stock is up almost 10% since our previous article on the company, and we believe it has additional upside potential.