A Nontraditional REIT Capitalizing on One of the Fastest Growing Industries in the World

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

The owner and operator of the largest independent portfolio of wireless communications and broadcast towers in North America, American Tower Corporation(NYSE: AMT), is only up 0.74% year to date, a far cry from the 15.35% return offered by the Dow Jones Industrial Average.  

As of September 2012, the company operated a tower portfolio of roughly 50,699 sites in the United States, Mexico, Brazil, Chile, Columbia, India, Peru, Ghana, and South Africa. The company's core business appears financially efficient, with a TTM profit margin of 19.70%. Based on market capitalization, the company is valued at $30.78 billion. 

With American Tower trading within a minor rally of all-time highs, is this nontraditional REIT a strong buy for a long-term portfolio, or should investors stay away from this company?

Strengths: 

  • Predictable & Stable Business Model:The company signs service providers to long-term leases, usually five to 10 years, that contain annual lease rate escalations of 3% to 5%.  As a result of the guarantee of a consistent revenue stream for a decade to come, American Tower’s business model is extremely predictable and stable, allowing the company to pay out a dividend yielding 1.39%.  

  • Institutional Vote of Confidence:92% of shares outstanding are held by institutional investors, representing over $25 billion in investment and displaying the confidence some of the largest investors in the world have in the company and its future.

  • Explosive Revenue Growth:In 2002, American Tower reported revenue of $788 million; in 2011, the company announced revenue of $2.44 billion, representing year over year annual growth of 13.51%, a strong trend that should continue into the future with projections placing 2016 revenue at $3.83 billion. This growth has been a result of rapid expansion and aggressive reinvestment by the company in new properties.

  • Cash Flow Position:In 2010, American Tower generated $834 million in cash flow, exemplifying the financial strength of the company.

  • Margin Expansion:Over the past decade, the company’s profit margin has expanded from extreme negative territory in 2004 to the current level around 20%.

Weaknesses: 

  • Net Debt:The company’s $382 million in cash and cash equivalents is outweighed by its $7.35 billion debt load, resulting in a net debt of $6.96 billion, 23.88% of total market capitalization, a minor financial weakness of the company.

  • High Valuation:At the moment, American Tower carries a price to earnings ratio of 52.97, a price to book ratio of 8.71, and a price to sales ratio of 10.83; all of which indicate a company trading with a high valuation.

Opportunities: 

  • Increased Data Usage: Global data usage has skyrocketed over the past few years, with further accelerated growth projected, and with this increased data usage comes opportunity for American Tower as increasing data usage requires service providers to add capacity to cell sites, as well as expand their networks, both of which benefit the company.

 

  • India: India has been a region of rapid expansion for the company, with American Tower entering into a build to suit agreement in India; the initial plan is for 200 towers for $15 million, with the company completing its first 52 towers during the 2008 third quarter and later purchasing XCEL Telecom Private Limited in May 2009. Just after the end of the 2008 third quarter, the company purchased 326 tower sites in India and in August 2010 closed a deal to acquire Essar Telecom, with 4,629 towers in India. Further growth in India is projected and provides incredible opportunity for the company.

  • 4G LTE: Upcoming network upgrades service providers will have to accommodate for 4G LTE service, which will provide a short-term revenue boost to the company.

  • Aggressive International Expansion:The international segment of the company’s business only accounted for 26% of revenue in 2011; however, fast-paced growth derived from Mexico and Brazil is anticipated as those companies deploy 3G networks. In the third quarter of 2012, the company acquired 850 international towers, while only acquiring six communication sites in the US, representing the incredible opportunity presented internationally.

  • Fundamental Global Mobile Trend: The total number of mobile devices has grown substantially over the past decades and is widely anticipated to continue to grow into the future, presenting American Tower the opportunity to capitalize on this fundamental global trend to mobile devices.

Threats: 

  • Faltering Consumer Confidence: Weakness in consumer confidence could lead to less mobile devices being purchased, which in turn could threaten the company’s growth.

 

Competitors: 

Major publicly traded competitors of American Tower include Public Storage(NYSE: PSA), Extra Space Storage Incorporated(NYSE: EXR), HCP Incorporated(NYSE: HCP), and Health Care REIT Incorporated(NYSE: HCN). None of these companies competes directly against American Tower, but are all located in the specialty REIT industry.  

Public Storage is valued at $26.09 billion, pays out a dividend yielding 2.89%, and carries a price to earnings ratio of 42.69. The company in no apparent way competes with American Tower, however it is an alternative investment in the REIT industry, which will take advantage of many of the same economic trends as American Tower. The company's business model has proven sustainable and profitable, with the company enjoying a TTM profit margin of 51.08%. 

Extra Space Storage is valued at $3.95 billion, pays out a dividend yielding 2.64%, and carries a price to earnings ratio of 39.30. Extra Space competes directly with Public Storage, as they operate in the same industry. Extra Space's business is also not as fundamentally sound as Public Storage's, with a TTM profit margin of 29.36%. 

HCP is valued at $21.83 billion, pays out a dividend yielding 4.36%, and carries a price to earnings ratio of 25.86. HCP operates in the health care REIT industry, allowing the company to capitalize on the constant demand for health care facilities. HCP possesses a fundamentally sound business with a TTM profit margin of 44.29%.   

Health Care REIT is valued at $16.63 billion, pays out a dividend yielding 4.78%, and carries a price to earnings ratio of 126.78. Health Care competes directly with HCP, however it possesses a business that has been decaying over the past years, with its TTM profit margin decaying to the current 15.29% level. 

The Foolish Bottom Line

Financially, American Tower is tremendously strong. The company possesses explosive revenue growth, a double digit profit margin, and an incredibly stable and predictable business model. Major weaknesses of the company are its high valuation and minor debt load. Looking forward, the company will derive fast-paced growth from its international segment and more modest growth from the United States. All in all, American Tower is a screaming buy, is perfectly positioned to capitalize on the monumental mobile trend, and will hand investors returns that trounce the overall market for years to come.

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Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends American Tower and Health Care REIT. 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!

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