American Tower - Great Business At A Bad Price

American Tower (NYSE:AMT) just may be a value investor's nightmare - a brilliant business, coupled with what looks like a nosebleed valuation. While I have no qualms at all about this company, and I love the business that it is in, I have a very hard time figuring out how to value the company in a way that makes it an appealing stock to buy today. IN PICTURES: Eight Ways To Survive A Market Downturn

The Quarter That Was
AmericanTower reported overall (normalized) revenue growth of about 9% and $470 million. Within that number, the company's core site rental business saw revenue grow 12%, and the company ended the quarter with more than 28,000 tower sites around the world.

This solid topline performance continued to flow through with strong margins. The company basically maintained its strong gross margins, and EBITDA climbed 12%.

All in all, it was another steady performance for AMT and that is not a major surprise - the company operates by securing long-term contracts with telecom providers like AT&T (NYSE:T), Verizon (NYSE:VZ) and Clearwire (Nasdaq:CLWR). That is not to say that there is no operation skill involved here - AMT does post better margins than rivals like Crown Castle (NYSE:CCI) and SBA Communications (Nasdaq:SBAC). What I mean to say is that once you figure out a winning formula here, the business can be a steady producer of cash flow.

The Road Ahead
Even though the cell phone business in the U.S. is very mature, that does not mean there is not more room for ancillary service providers like AMT. You can say that everybody who is going to have a cell phone already has one, but there is an ongoing upward trend in demand for bandwidth - fueled by new super-phones like Apple's (Nasdaq:AAPL) iPhone. Providers need to install more equipment to supply that bandwidth, and that can require more towers.

Apart from that, however, there is an international growth story here. AMT also operates in Mexico, Brazil and India. Although contributions from those countries is a modest part of the company's revenue today, it is clearly a growth opportunity as those economies develop and customers there demand more and more services. (For more, see 3 Secrets Of Successful Companies.)

Investors also should keep in mind that AMT is likely to significantly change its operating structure in a few years. The company is still burning through some net operating losses (which shield earnings from taxes), but those expire relatively soon. At that point, AMT becomes a company with very high margins and rich streams of earnings and cash flow. To become more efficient conduit of shareholder value, then, AMT will probably become a REIT. This is not a bad thing at all, but it will change the dynamics of the expected returns, particularly if U.S. tax laws change again with respect to capital gains and dividends.

The Bottom Line
As I said in the open, AMT is a business I love and a stock that does not excite me. Even allow for solid high-single-digit revenue growth and significant improvement in free cash flow margins over the next five years, I just cannot arrive at a price target that makes AMT look cheap. Basically, if this stock is undervalued, you have to argue that the company is going to achieve some combination of double-digit revenue growth, better than 50% improvement in cash flow margins, and/or a very low discount rate.

I am not willing to make those leaps of faith, so for now I will remain an admirer from afar. (For more, see The Value Investor's Handbook.)

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