Is American Tower Really a Strong Sell?
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Carson Block, CEO of Muddy Waters Research, dropped a "blockbuster" on American Tower (NYSE: AMT) during a featured interview early July 17 on Bloomberg TV . The worst accusations targeted American Tower's reporting and business practices in "emerging and frontier" markets. An accounting discrepancy regarding a purchase of communication tower assets in Brazil was discussed at length. Mr. Block also spoke about American Tower’s REIT status as being “just under the wire,” and describing American Tower as “a reasonable doubt REIT.” He also questioned whether the company's management and stockholders interests were aligned, citing as examples two different measures of EBITDA, and management incentives for tower growth rather than shareholder profits.
Muddy Waters Research placed a Strong Sell on American Tower and initiated its first ever short position on a U.S. company. After initially opening lower, the market appeared to digest this report, and mid-day the stock bounced back considerably, ending up down only a little over 1% for the day. However, 23,473,800 shares changed hands, over seven times the average daily volume for this stock. Clearly some stockholders were rattled. There may have only been "collateral damage" to the stock price, but huge blocks of shares have been redistributed among the American Tower bulls and bears.
Okay, enough about traders. Foolish investors should calmly look at the facts, and make an informed decision regarding American Tower, and its two largest U.S. competitors.
Stocks in this sector are all "priced for perfection"
All three of these companies have very high TTM P/E ratios. The P/E ratio for American Tower is close to 50, for Crown Castle International (NYSE: CCI) about 142, and SBA Communications (NASDAQ: SBAC) lost $1.51 per share in 2012, and is projected to lose $0.44 per share this year. So is it all about growth for these companies? The market seems to think so.
All three of these companies have a "nosebleed" price to sales ratio, or P/S. Simply put, all things being equal, the lower this ratio is, the better it is for investors. The industry median P/S is important, and Crown Castle is the "cheapest" using this metric. However, investors need to realize that 1.5 is the current median S&P 500 price to sales ratio. Although it is difficult to compare industries, just for perspective Google's P/S ratio is 5.65, Apple's is 2.4 (and pays a 2.8% dividend, just saying), and Amazon's P/S is 2.16. Tesla Motors has a 14.56 P/S -- a great company, but is it a great stock at this price? The same question should be asked by any investor intrigued by the rate of growth of wireless data transmission.
Geography, foreign exchange and rates of return
American Tower is a leading independent owner, operator and developer of wireless and broadcast communications real estate. It is the second largest REIT in the U.S. behind mall landlord Simon Properties. American Tower currently owns and operates approximately 56,000 communications sites in the United States, Brazil, Chile, Colombia, Germany, Ghana, India, Mexico, Peru, South Africa and Uganda.
It is this focus on the international growth that seems to be a major concern. Foreign exchange issues have been cited by management in the recent past as a factor for missing Wall Street estimates. Carson Block also pointed out that American Tower's internal rate of return in each market outside of the U.S. was lower than the cost of capital (long term bond) in every country American Tower does business, with the exception of Germany.
How about the competition?
SBA Communications (NASDAQ: SBAC) owns and operates wireless communications towers in the United States, Canada, Costa Rica, El Salvador, Guatemala, Nicaragua, Panama, and Brazil. The company leases antenna space primarily to wireless service providers on towers and other structures that it owns, manages, or leases from others. As of December 31, 2012, it owned 17,491 tower sites. The company also managed or leased approximately 4,800 actual or potential communications sites.
More "boys from Brazil"
Ironically, SBA Communications announced on July 15 the purchase of an additional 2,113 towers in Brazil. How is that for timing? SBA expects to fund the purchase price from cash on hand and from borrowings under its $770 million revolving credit facility. SBA anticipates that "the transaction, upon closing, will be immediately accretive to AFFO per share." Including this transaction, SBA owns or is under agreement to acquire direct ownership or use rights with respect to over 3,000 towers in Brazil. SBA now owns approximately 20,000 towers world wide with 15% of them located in Brazil. It is interesting that they chose to report AFFO, usually a metric that is seen in REIT financial statements, such as American Tower.
A company primarily focused on U.S. market share
Crown Castle International (NYSE: CCI), together with is subsidiaries, owns, operates, and leases shared wireless infrastructure primarily in the United States, Puerto Rico, and Australia. As of December 31, 2012, it owned, leased, or managed approximately 31,500 towers.
Fellow Motley Fool blogger Matt Lin, recently pointed out that Crown Castle is the largest domestic tower operator, with about three quarters of its towers located in the top 100 Basic Trading Areas, or BTAs. By comparison, American Tower and SBA Communications have 62% and 58% of their towers located in the top 100 BTAs respectively. Investors might want to note that 94% of Crown Castle's earnings come from U.S. dollars. The other 6% comes from Australia, a relatively stable market and currency, as of the quarter ending December 31, 2012.
During a March Raymond James investment conference presentation on Crown Castle, they pointed out that the expected growth in data transmission in the U.S. will be primarily driven by smart phone, tablet usage, as well as the importance of network speed and quality to the customer. The rate of data growth presented was really staggering: "by 2017, U.S. mobile data traffic will be the equivalent to 700x the volume of U.S. mobile traffic in 2007." They concluded the presentation by recasting Crown Castle's past results using non-GAAP accounting: EBITDA, AFFO, and FFO. Raymond James closed by presenting 2013 operating results in the same fashion, as if Crown Castle were taxed as a REIT. Again, this allows investors to make an easier comparison to American Tower's results.
How investors have voted during the past year:
American Tower is the only company approved as a REIT, and currently pays out a dividend yield of 1.5%. REITs must pay out 90% of their earnings to shareholders each year. SBA Communications stock has performed the best this past year. However, the company is highly leveraged, and funded a substantial part of its recent growth with debt. Crown Castle International, in spite of its name, does not have a significant foreign exchange exposure in emerging and frontier markets. Crown Castle has the largest domestic tower footprint. It remains primarily focused upon U.S. wireless traffic growth – which many analysts believe to be one of the most profitable markets moving forward.
I would be interested in your comments regarding the "value proposition" in the communications tower space. How can these companies balance tower growth with earnings growth moving forward?
American Tower will announce results of its quarter ending June 30 at 7:00 a.m. ET on Wednesday, July 31. In addition, the company has scheduled a conference call at 8:30 a.m. ET on July 31 to discuss its results. I think that investors trying to pick a winner in this "three horse race" would be wise to listen in on their smart phones.
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Bill Stoller has no position in any stocks mentioned. The Motley Fool recommends American Tower . The Motley Fool owns shares of American Tower . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!