Profiting From AT&T’s Game of Catch Up

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

AT&T (NYSE: T) recently announced plans to dramatically ramp up 4G LTE coverage by increasing capital spending by $14 billion over the next three years. The plan allows the company to attack more aggressive coverage targets as it struggles to catch up with rival Verizon Communications (NYSE: VZ). The biggest immediate winners from the news are cell tower owners including American Tower (NYSE: AMT), Crown Castle International (NYSE: CCI) and SBA Communications (NASDAQ: SBAC). While these beneficiaries got a quick pop of the news release, American Tower appears to be well positioned for the medium-term and should be consider for your core portfolio.

The Spending Ramp Up

Last week, AT&T announced that it plans to make a significant push to accelerate its 4G LTE coverage through increased spending. The company said it intends to cover 300 million potential customers by the end of 2014, ramping up its target of 250 million by the end of 2013. CEO Randall Stephenson commented on the move: “This is a major commitment to invest in 21st Century communications infrastructure for the United States and bring high-speed Internet connectivity — 4G LTE mobile and wireline IP broadband — to millions more Americans.”

His remarks were not limited to the benefits to customers, however; with reference to AT&T investors, he added: “We have the opportunity to improve AT&T’s revenue growth and cost structure for years to come, and create substantial value for shareowners.” By comparison, Verizon already is available to 250 million people in the U.S. and boasts more coverage in the 4G LTE space than all other competitors combined. Even with Verizon’s dominance in customer coverage, AT&T has done a solid job thus far in retaining customers. The two companies are considered to have a virtual duopoly in the U.S. market.

The Quest for the Ivory Tower

As things currently stand, AT&T has fairly dense coverage in most major urban areas. Where the company struggles to keep pace with Verizon is in rural areas. While the focus on denser population areas has been successful for AT&T in general, the company’s commitment of $8 billion towards expansion into new coverage areas demonstrates its understanding of the importance of the move. As part of the initiative, the company intends to add 10,000 cell sites 40,000 small cells.

All three of the largest tower companies reacted positively to the news from AT&T, but, as you can see from the chart below, none has exploded. What is perhaps more heartening for investors is a look at the second chart below that depicts the performance of all three over the past five years. While none of these companies was immune from the economic crisis of late 2008 that brought the entire economy to the precipice, ever since, each has marched steadily higher. This is the type of performance chart that every investors hopes for in his or her core portfolio.

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AMT data by YCharts

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AMT data by YCharts

The Trade

While all three of these companies look appealing, I give the slight edge to American Tower. Even with Crown Castle’s acquisition of 7200 T-Mobile towers – making it the largest operator in the U.S. – American Tower has the largest market cap and the lowest P/E of the three. With a 42% operating margin, the company runs more efficiently than Crown Castle at 37% or SBA at 21%. Finally, American Tower pays a modest dividend of 1.2%, but neither of its main competitors pays any dividend. While much has been made about the changing tax treatment dividends may receive next year, the addition of an income element is favorable for the stock.

Overall, the industry looks very strong as there is no sign that wireless is slowing down, and the AT&T news should be a positive catalyst. The steady march higher should be expected to continue for American Tower, making it a solid addition to your core portfolio at current levels.

dsewrites has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Tower and AT&T.; 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.If you have questions about this post or the Fool’s blog network, click here for information.

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