Finding A Win-Win Stock
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors have many ways to win with American Tower (NYSE: AMT), the world's leading wireless communications and broadcast tower owner, making it an attractive short-term and long-term investment. Along with the recently declared $0.21 quarterly dividend that yields about 1.33% at the recent share price of $64, investors can look for continued share repurchases, margin improvement, and geographic expansion to drive growth in revenue and earnings estimated to be 14.4% and 71%, respectively, in 2012. Longer term, the company is well positioned to drive its value higher through revenue and free cash flow growth by increasing its utilization per tower, increasing its global presence, and reducing its capital expenditures as a percent of revenue as more towers come online.
For 2012, American Tower should be able to realize revenue growth, margin expansion and earnings per share growth from the $3.7 billion in acquisitions it has made since 2009, the $500 million purchase of about 2,500 towers in Mexico in late 2011, the new tax efficient real estate investment trust (REIT) structure adopted in 2012, and continuation of a $1.5 billion stock repurchase plan initiated in 2008. This repurchase plan has pared the outstanding share count to about 400 million from about 436 million at year end 2006.
At a recent share price of about $64, American Tower has a forward P/E ratio of about 38x for 2012 which is modest given expected earnings per share growth of about 71%. The price to earnings to growth (PEG) ratio is 0.53x which is very attractive compared to American Tower's two primary competitors, SBA Communications (NASDAQ: SBAC) and Crown Castle International (NYSE: CCI). SBA Communications is projected to have negative earnings in 2012 thus does not have forward P/E or PEG ratios. Crown Castle has a forward PEG ratio of 1.26x for 2012 based on a forward P/E ratio of about 67x and expected earnings growth of about 53%. The high growth rate of Crown Castle indicates that the industry is in a strong growth cycle and I believe that American Tower can achieve a higher earnings growth rate due to its market leading profitability margins, recent acquisitions, increased tower utilization, and geographic expansion. The company's long term average gross margin of about 63% is above Crown Castle's long term average of about 61% and SBA Communications' average of about 53%. In terms of long term average operating margin, American Tower's 16% easily outpaces Crown Castle's 9%, while SBA Communications' long term operating margin is negative.
My expectation is that revenue, income, and cash flow growth over the longer term will be driven by several factors. First, American Tower currently has an average utilization of 2.1 tenants per tower which the company expects to move closer to its full capacity of four tenants per tower. This will drive revenue growth and expand operating margins. Secondly, the company is expanding on a global basis into emerging markets thus the total number of towers will drive revenue growth. Third, pent-up demand for premium unlimited data plans and migrating subscribers to next-generation networks like long term evolution technology, or LTE, will spur wireless carriers like AT&T (NYSE: T) and Verizon (NYSE: VZ) to continue upgrading their networks which will make the tower firms prime beneficiaries of this growth cycle.
American Tower has some risks that investors need to consider but I believe these issues are mitigated by factors that blunt their negative impact on the intrinsic value of the company. Specifically, American Tower's long-term debt to equity ratio is high at about 1.5x but interest coverage at 3x is more than ample, there are no significant maturities until 2014, and debt is manageable compared to the debt to equity ratios of around 3.0x for Crown Castle and over 529x for SBA Communications, which has minimal equity. A second concern for American Tower is that capital expenditures have risen from about 10% of revenue in 2006 to more than 21% of revenue in 2011 which may indicate permanently reduced cash flow capacity that will crimp free cash flow if not returned to a level closer to 10%. I expect this ratio to go lower as tower utilization increases closer to 4 tenants per tower. By making moves to broaden its revenue base geographically into South America, Africa, and Asia, the company faces emerging market risk such as nationalization of assets but I believe this risk is minimal, especially since the company generates about two thirds of its revenue from the four biggest wireless carriers in the United States. Although this concentration risk in the U.S. is much more significant than emerging market risk, it is manageable given that the U.S. telecom industry is highly regulated and a failure by any of the major wireless carriers would not lead to significant losses for American Tower. The customers would be picked up by other carriers and the towers would still be needed to carry traffic. Finally there is some environmental regulation and zoning risk but the company has handled these issues in the past and as the leading player in the industry is well-equipped to continue dealing with them in a constructive way going forward.
American Tower's shares are poised to increase from the recent $64 price because the company has several avenues for boosting intrinsic value. Share repurchases, margin improvement, geographic expansion, increased tower utilization, reduced capital expenditures as a percent of revenue, new tax efficient REIT structure, and increased tower demand from wireless carriers in response to customers' pent-up demand for unlimited data plans and next-generation networks. The company's past performance and competitive position unmistakably surpasses its competitors and if either of them is unable to manage their excessive debt loads, American Tower is in a position to benefit by acquiring assets at distressed prices or gaining market share. With so many possible good outcomes, American Tower's shareholders have a tremendous opportunity to reap significant rewards if any or all of these factors are realized.
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