Betting on the Wireless Revolution
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The latter part of the telecom market is heavily concentrated, with the likes of major telecoms, including AT&T, Verizon, Sprint Nextel and T-Mobile owning the market. However, if we travel back up the telecom food chain, the concentration is even greater in the telecom tower providers. The market is run by three major players, including American Tower (NYSE: AMT), Crown Castle International (NYSE: CCI) and SBA Communications (NASDAQ: SBAC). While American Tower is the only REIT of the three, the other two hope to one day gain the status.
So what's the key drivers for the tower stocks going forward? Well there are a number; including network upgrades to 4G, deployments of 3G networks in urbanizing countries, and overall increased usage of smartphones and tablets.
I think American Tower is the monopolistic bet on the industry and the best bet. American Tower operates the largest independent portfolio of wireless communications and broadcast towers in North America, based on tower number and revenue.
American Tower has a tower portfolio of over 55,000 multi-user sites in the U.S., Mexico, Brazil, Chile, Colombia, India, Peru, Ghana, Germany, Uganda and South Africa. The company's primary business is leasing antenna space on multi-tenant communications towers to wireless service providers and radio and television broadcast companies.
American Tower tends to sign service providers to long-term leases of five to ten years that contain annual lease rate escalations of 3% to 5%. The average remaining lease term of American Tower with its top four U.S. customers are more than eight years. At the end of 2012, the company had $19 billion worth of non-cancelable lease backlog, equally over seven years of revenues.
International growth is expected to be the big growth driver for American Tower going forward. Its international business accounted for nearly a third of its first quarter results.
Wait for the pullback
American Tower is relatively flat since Muddy Water presented its strong sell thesis, calling the company a potential fraud. The research firm believes American Tower's fair value lies 40% below current trading levels. The shorts are yet to make a meaningful move in the stock. I do ultimately expect the shorts to come in for a quick profit, thus, it's important to hold off and let the pullback happen before loading up on the shares.
Crown Castle International owns and operates towers and transmission networks for wireless communications and broadcast transmission companies. At the end of the first quarter, Crown owned, leased, or managed over 31,500 towers and rooftop systems.
In 2012, 72% of total revenue was derived from Crown Castle's top four customers, AT&T, Verizon Wireless, Sprint Nextel and T-Mobile, accounting for 24%, 20%, 17% and 11% of revenue, respectively. One of its downsides is its levered balance sheet. At the end of the first quarter, the company had nearly $10.7 billion of net debt and a debt to capital ratio of 78%.
A potential headwind for Crown Castle is the downsizing of towers by major players thanks to mergers. T-Mobile and MetroPCS jointly share 1,400 Crown towers, Sprint Nextel and Clearwire share 2,700 towers.
SBA Communications has its principal tower operations located in the U.S., with over 17,500 towers in its portfolio. Revenues are expected to be up 33% in 2013, but growth is expected to slow to 10% in 2014 and 9% in 2015. The company also has a high concentration among the major telecoms. Its top four customers represent over 65% of revenues, where Sprint made up 21.2% of revenue, AT&T 20.4%, Verizon Wireless 12.7%, and T-Mobile 12.7%.
With all its operations in the U.S., namely in the eastern part, one of the key initiatives for the company is to expand beyond, this includes its recent endeavor into Brazil. SBA Communications plans to buy Oi SA's 2,113 towers for $300 million.
American Tower is the only one of the three wireless tower operators that operates as a REIT -- and it pays a 1.5% dividend yield. The other appealing aspect about American Tower is its low volatility, as evidenced by its 0.5 beta.
The rising number of wireless users and overall data consumption is a big positive for the telecom towers. Despite concerns surrounding American Tower's aggressive expansion in global and emerging markets, the company is, and should remain, an industry leader.
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Marshall Hargrave 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!