The Best Wireless Tower Play

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investing in wireless tower companies should seem like a logical investment. The popularity of smartphones and tablets has led to increased demand from wireless service providers. Not only that, but most wireless tower companies have entered long-term agreements with wireless service providers, price escalations included. Furthermore, wireless tower companies are acquiring smaller players at a rapid rate in order to capitalize on growth potential for the industry.

No bull 

If you only read the paragraph above, then you would see reasons to be bullish. And that would be a logical calculation. However, it’s often dangerous for companies to assume long-term success prior to having established that kind of success. In other words, these wireless tower companies might be acting too aggressively with acquisitions and accumulating debt. It should also be noted that none of the companies mentioned below held up well whatsoever when the market tanked in 2008/2009, which demonstrates a lack of resiliency. All that said, one company does appear to be a better investment opportunity than the others. 

Fundamentally sound, relatively speaking

American Tower's (NYSE: AMT) net margin is 20.66%, making it much stronger than peers in that area. It’s also the only company of the three mentioned in this article that pays a dividend, and it currently yields 1.50%. The company’s debt-to-equity ratio of 2.45 isn’t impressive, but relative to its peers, it's a home run. American Tower has seen revenue consistently improve annually, and earnings have improved over the past three years.

American Tower manages 56,193 communication towers (55,720 wireless), and these towers are geographically diversified. The company aims to benefit from emerging market growth, including Brazil, Mexico, and India. The latter has the potential to pay significant dividends considering the county’s robust population of 1.24 billion people. That’s a lot of potential smartphone users, which means revenue potential for American Tower.

The biggest concerns for American Tower are foreign exchange rates and a downturn in the global economy. As hinted at earlier, American Tower lacks resiliency.

Expansion through acquisitions

Crown Castle (NYSE: CCI) doesn't have an impressive net margin (3.26%) or balance sheet  (3.69 debt-to-equity), and the stock is trading at 227 times earnings (versus 43 times earnings for American Tower). If you knew nothing about the business, and you only looked at these numbers, you probably wouldn’t entertain the thought of an investment.

The good news is that Crown Castle has offered strong full-year earnings guidance of $0.40-$0.73 per share from $0.35-$0.68. Revenue is also likely to see strong growth thanks to the company’s recent acquisitions of NextG Networks (7,000 antenna systems) as well as 7,000 towers from T-Mobile USA. Furthermore, Crown Castle has many long-term contracts, ranging from 5 to 25 years, as well as expected price hikes of 3% to 5% on those contracts.

Crown Castle has seen consistent revenue increases annually, and it has been profitable over the past two years. Cash flow generation should be good, but the bottom line might present more of a challenge.

A sea of red

Like American Tower and Crown Castle, SBA Communications (NASDAQ: SBAC) has seen consistent revenue improvements annually, but it loses money on an annual and quarterly basis. And there doesn’t seem to be much hope for sustainable profitability in the near future.

SBAC should continue to grow the top line, and it’s looking to capitalize on growth potential in Brazil, having acquired 800 wireless towers from Vivo S.A. earlier this year, and then agreeing to a deal with Oi SA for the rights to 2,113 towers. The latter deal is supposed to close by the end of the year. And SBAC expects the Oi SA deal to generate $32.4 million in revenue in 2014.

SBAC has outperformed its peers over a three-year time frame, but that growth has come at a cost, which is evidenced by a debt-to-equity ratio of 12.95. Though it might remain the top performer at the moment and for the near future, it’s unlikely to be the top performer of this group over the long haul.

Conclusion

Despite strong trends, this industry is highly susceptible to weakening economic conditions. Since it’s unknown how the economy and stock market will respond to a potential reduction in monetary stimulus later this year, these are high-risk investments. If you ache to be in the space, then American Tower looks to be the best investment option of the three.  

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends American Tower . The Motley Fool owns shares of American Tower and has the following options: short August 2013 $70 puts on 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!

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