Towering Competition

By Chad Henage - July 21, 2012 | Tickers: AMT, CCI, SBAC | 0 Comments

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An interesting article that I recently read on The Motley Fool, prompted me to consider a few companies that I really had never researched. Interestingly, the title of the article was, “One stock to sell before its earnings release.” While I understand the author's reservations about the particular company Crown Castle International (NYSE: CCI), that doesn't mean that the whole industry is a problem. The industry we are talking about, is the ownership of cell towers. Generally speaking, when I come across a new industry that I have not researched before, I like to compare multiple companies to see which one might represent the best value. Let's take a look at three different companies that are cell tower owners, and see if we can determine if any of these companies should be a part of your portfolio.

The industry itself is as straightforward as you can get. Basically what each company is looking to do, is to buy, build, or lease cell towers and then collect rents going forward. As the author of the previously mentioned article, Keith Speights correctly pointed out, business is booming. With wireless demand increasing due to the use of smart phones, tablets, and other devices, these companies should have multiple years of significant earnings increases. The challenge that all three companies face, is the ability to finance their growth through their expansion period. In particular, Crown Castle International is bidding on the U.S. tower outlets of T-Mobile. While this bid, if won, would increase the company's tower count by 30%, the company has to be able to afford this outlay. Now that you know a little bit about the business, let's take a look at how each of the stocks are valued. We've already mentioned Crown Castle International, we'll also look at American Tower (NYSE: AMT), and SBA Communications (NASDAQ: SBAC).

The first way I like to measure the value of a company is to compare the companies forward P/E ratio versus its expected earnings growth. Take a look at how the three companies compare on this measure:

It appears, that the market values each of these companies very highly, which is not a huge surprise considering the nature of their business. That being said, with American Tower selling for 2.28 times earnings growth, it seems this company could be the best value. (Crown Castle – 2, American Tower – 3, SBA Communications – 1)

Each of these companies, because of the expense to buy or build a tower, should be expected to have a high depreciation allowance. Because of this, we need to look beyond earnings per share to get a more fair comparison. To come up with a good apples to apples comparison, I like to look at free cash flow per each $1 of sales. Using this measure, American Tower is the clear leader. The company produced $0.26 of free cash flow per each $1 of sales during last year. By comparison, SBA communications produced about $0.17, and Crown Castle generated $0.14. With American Tower generating the most free cash flow, the company should be in a position to reward shareholders more than the other two companies. (Crown Castle – 1, American Tower – 3, SBA Communications – 2)

Another factor to consider, when choosing between multiple companies in the same industry, is their dividend yield. This category is extremely simple, as only American Tower pays a current dividend. With a dividend yield of 1.22% and a payout ratio of just 21.43%, American Tower's dividend seems safe, and is certainly better than nothing which is what the other two offer. (Crown Castle – 1, American Tower – 2, SBA Communications – 1)

Last but not least, let's compare each of the three companies balance sheets. This should give us an idea of which company is best able to afford building out their assets going forward. This is yet another category where American Tower seems the clear winner. The company's equity to assets ratio is 2.17, versus Crown Castle's equity to asset ratio is 3.08, and SBA Communications' ratio is actually negative. A lower equity to assets ratio means less relative leverage, and should mean more flexibility for American Tower in the future. (Crown Castle – 2, American Tower – 3, SBA Communications – 1)

Looking at our final scores, we see Crown Castle scores a 6, American Tower scores an 11, and SBA Communications scores a 5. Based on final scores, American Tower seems the best value. The company generates the most free cash flow, pays the only dividend, and has the least leverage on its balance sheet. Investors looking to capitalize on the continued growth of the wireless industry, would do well to add American Tower to their Watchlist.

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