American Tower Still Great, And Still Expensive

By Stephen D. Simpson, CFA | November 02, 2011 AAA

Communications tower owner American Tower (NYSE:AMT) knows well what many landlords have long realized; it is a great business to own a valuable asset that your customers can't build for themselves, but must have in order to stay in business. Better still, not only is there still growth potential in the U.S., from higher occupancy, more towers and higher prices, but even greater potential overseas.

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A Fairly Good Third Quarter
There are no complaints with the top line numbers that American Tower reported. Revenue rose almost 23% to $630 million, surpassing the average analyst estimate and matching the high end of the range. While overseas growth was eye-popping at 79% year-on-year, domestic growth of 9% is pretty good, in its own right, considering how mature the U.S. mobile phone market is.

Margins were arguably not as strong for the company. Adjusted EBITDA rose more than 14% this quarter, and the margin sank about a point and a half, sequentially, and nearly five points from last year.

American Tower continues to aggressively add to its property book as well. The global site count increased 20%, from last year, and the company added over 1,850 incremental sites from the second quarter.

Domestics Still Building
With AT&T (NYSE:T) and Verizon Wireless, co-owned by Verizon (NYSE:VZ) and Vodafone (NYSE:VOD), actively rolling out next-gen services, leasing activity from these carriers has been strong at American Tower and SBA Communications (Nasdaq: SBAC). This is likely to continue, as carriers simply cannot afford to have areas of poor service or dead zones. Network coverage issues have been a major impediment for Clearwire (Nasdaq:CLWR), for instance, and customers simply expect near-perfect service.

While certainly behind in many respects, Sprint (NYSE:S) has aggressive plans to stay in the next-gen game. In a much-publicized break with Clearwire, Sprint will be building out its own network and has reached Master Lease Agreements with both American Tower and SBA. These agreements should, at a minimum, help offset waning iDEN business from Sprint.

International a Call Option on Growth
American Tower could be a great cash-generating business, just on the basis of its domestic towers, and is, in some ways, like a resource trust that just doesn't deplete. However, this company also has an impressive overseas growth opportunity.

About two-thirds of the company's towers are in the U.S. and there should be major expansion potential in markets like Mexico, Brazil, South Africa, India and other emerging markets. While companies like Vodafone, Telefonica (NYSE:TEF), China Mobile (NYSE:CHL) and France Telecom (NYSE:FTE), have put wireless phones in the hands of billions of people, coverage is still always reliable outside of the major cities, and network upgrades will likely require more towers.

Certainly this growth is not risk-free. Governments like Venezuela and Zimbabwe have amply demonstrated that once business-friendly states can sharply reverse course, and some countries have exclusionary or inconvenient laws that can impact American Tower's ownership rights and potential. Still, there is more than enough business available in business-friendly countries, to make this a powerful potential growth engine.

The Bottom Line
I've started to rethink how I value American Tower, and I give a lot more credit now to the idea that the company can produce double-digit, or at least high single-digit, revenue growth, with ongoing cash flow margin improvement. After all, this company has proven that it can generate better margins than SBA and Crown Castle (NYSE:CCI), and that overseas growth potential is significant.

Still, even with more robust assumptions the stock is not exactly cheap, in my eyes, and there is very much a risk that if the growth story disappoints at all, the multiples could contract brutally fast. With a conversion to a REIT on track, in about two months' time, it will be interesting to see what sort of income this company ultimately throws off in dividends. In the meantime, American Tower is far from the cheapest stock out there. Investors who want to play telecom service infrastructure, may want to think about names like 21Vianet (Nasdaq:VNET), Interxion (Nasdaq:INXN) and Equinix (Nasdaq:EQIX), but none of those have the demonstrated quality of AMT. (For additional reading, see How To Pick The Best Telecom Stocks.)

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At the time of writing Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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