Apple Loses to Samsung - Who Cares?

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

The past few days have seen much beating of breast, gnashing of teeth, wringing of hands and banging of heads in response to Samsung’s mobile phones outselling Apple’s (NASDAQ: AAPL) iPhones.  I say, “Big Deal.”  

Is Apple in Trouble? No.

Yes, Apple is down about 20% from its recent high.  Some say its because competition, others claim its macro-economics making life tough for all tech companies (I guess they didn’t hear that Apple’s revenues were up $35 billion during these tough macro-economic times).  “Apple is showing its age” bemoaned another headline.  

There are even those claiming Research In Motion's (NASDAQ: BBRY) BB10 competition is hurting iPhone sales.  Please.  RIMM smart phones have a reputation for being solidly built with great security features, but the company seems heavily reliant on government purchases to stay afloat.  Let’s face it, if your company depends on hopelessly indebted and woefully inefficient Uncle Sam, you’re company is in trouble.

I think Apple is simply reloading and reloading takes time.  With $29 billion in cash and $41 billion in net income over the past 12 months, Apple has a pile of ammo to reload with.  Given its market presence, brand loyalty and in house talent, it’s just a matter of time before Apple wows the world with another great product.  If it could wow the world with better iCloud service, that wouldn’t hurt, either.

Samsung makes a great smart phone and is making a go of it in the tablet world.  Like Apple, they are pushing to bring a flexible screen product to market, possibly in 2013 (bear in mind, they have promised this before). They make lots of other great stuff and should do well for years. 

Who Handles the Wireless Signal?

So why my ambivalence regarding smartphones or other wireless products?  As an investor, I’m more interested in the fact that smartphone sales exceeded client PC sales in 2011.  I’m also aware that 66% of young adults own smart phones.  There’s a growing pile of wireless data being downloaded out there with no end in sight, and I’m more interested in companies handling that wireless data than companies building smartphones and tablets.

Two Companies to Contemplate

American Tower (NYSE: AMT), despite its name, provides wireless services to cell phone carriers and broadcasters worldwide.  Currently, American Tower operates more than 50,000 communications sites and provides a range of related services in the US, Asia, Central and South America and parts of Africa.  American recently acquired rights to cell phone towers in Germany, the largest cell phone market in Europe.  It is the largest independent cell phone and broadcast towers in the United States by revenue.  Its core business is renting and servicing antenna space on these towers.   As such, it enjoys a steady stream of rental income.  The last quarter brought good news to shareholders.  Earnings came in at 58 cents pershare, above the consensus of 38 cents.  Other financial metrics were equally impressive.

American Tower recently began operating as an REIT, but also operates so-called “taxable REIT subsidiaries” or TRSs.  Income generated by TRSs does not have to be distributed to shareholders.  That income is subject to corporate tax.  According to the Form 10-K filed by the company, TRS operations include foreign operations. REIT income is not subject to tax, but 90% must be distributed to shareholders.  This distribution occurs solely at the discretion of the Board of Directors, not a fixed schedule.  One dark cloud on the horizon is corporate debt load.  With a debt to equity of approximately two, American may not have the resources to pursue acquisitions or to handle setbacks as well as it would like.

Crown Capital (NYSE: CCI) presents an enigma of sorts.  Its in the same business and a staunch rival to American Tower.  The stock sells for 75 times earnings vs. American’s 41.  It’s last earnings report missed consensus estimates by a penny.  Return on equity is significantly lower than for American.  Crown recently acquired rights to 7200 towers from T-Mobile and took on a sizable hunk of debt to finance the deal.  If the deal is finalized, Crown will be bigger than American Tower.  Crown pays no dividend.  Yet for all the earnings disappointment, debt and high PE ratio, the stock has outperformed American Tower over the past year.

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Chart courtesy of The Motley Fool

Guess those T-Mobile towers give investors confidence.

Foolish Final Thoughts

Growth in wireless communications continues growing at a blistering pace.  In response, for example, AT&T (NYSE: T) announced plans to invest $8 billion in wireless infrastructure.  This announcement boosted both American and Crown shares.  Looking forward, I believe both American and Crown will enjoy significant growth.  For investors looking for income and growth, American looks good; for outright capital gains, go with Crown, but monitor how it handles its debt.  Many folks seem to be caught up in the drama of Apple vs. Samsung.  Look beyond who wins the protracted hardware war: there’s no doubt growing wireless communications generates growing profits for the tower operators.  To me, this is where your investment dollars should go.

dylan588 has long positions in American Tower and At&T. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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