More Expensive But Still a Long Term Winner
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a posting in mid-April, I was bullish on shares of American Tower (NYSE: AMT), the world's leading wireless communications and broadcast tower owner. At that time, the company’s shares were trading around $64 per share and my positive outlook was based on an anticipated increase in intrinsic value driven by share repurchases, margin improvement, geographic expansion, increased tower utilization, reduced capital expenditures (as a percent of revenue), a new tax efficient REIT structure, and increased tower demand from wireless carriers. Now, after almost three months and one quarterly earnings announcement, American Tower’s shares trade at about $72 or more than 12% higher. So why was my favorable outlook rewarded with a higher share price? We can get an answer to that question by looking at the components of my bullish thesis. And then an examination of analyst’s consensus growth estimates and price to earnings to growth (PEG) multiples will reveal how the market views American Tower now compared to the prior period.
Outstanding share count is essentially unchanged at about 400 million as only about 100,000 shares were repurchased in the first quarter of 2012 ending in March. The second leg of my thesis was the potential for profit margin expansion driven by increased tower utilization and recent acquisitions to spread costs over a wider revenue base. On this score, American Tower saw its operating margin increase to 39.4% in Q1 2012 from 38.0% for the fourth quarter of 2011 and 38.8% for the first quarter of 2011. So it may be that shares received a boost of some magnitude from improved profitability. However, tower utilization was flat and not a contributing factor to margin improvement as gains in established markets were offset by recent entry into markets where tenants per tower is still lower. Going forward, over the long term increased tower utilization is still expected to support revenue growth and margin expansion.
As a percentage of revenue, capital spending fell to 17.4% in the first quarter of 2012 which is significantly lower than 21.4% for all of 2011 but flat with the first quarter of 2011 and still well above the historical average before 2011 of around 13%. Capital spending is lumpy and a single quarter may or may not be indicative of the underlying trend, but going forward, I still expect the company to reduce its capital spending as a percentage of revenue as greater tower utilization, acquisitions, and geographic expansion boost revenue.
American Tower and its two main rivals, Crown Castle International (NYSE: CCI) and SBA Communications (NASDAQ: SBAC), have each seen their shares rise since my earlier posting with Crown Castle leading the pack with an almost 13% rise, just ahead of American Tower’s 12% plus advance and SBA’s almost 10% rise. As a result of its share price increase and revised earnings estimates, American Tower currently has a 2012 PEG ratio of 0.5x which is lower than the 0.53x in April. Looking to 2013, the PEG multiple is 2.22x currently, which is expanded from 1.74x in April as a result of both lower EPS growth estimates and share price appreciation. Earnings estimates for 2012 for Crown Castle are unchanged so the company has seen its 2012 PEG ratio expand to 1.43x currently from 1.26x previously due to the share price appreciation. For 2013, the PEG multiple has expanded significantly to 2.07x currently from 1.0x in April due to the share price appreciation and an almost 12% cut in expected EPS for Crown Castle to $1.04. As was the case in the April posting, analysts expect net losses for SBA Communications thus PEG analysis is not meaningful. However, it is worth noting that earnings estimates for 2013 have improved to ($0.19) currently from ($0.31) back in April which helps explain its share appreciation of nearly 10%.
Although the recent positive share price action and reduced consensus growth outlook for 2013 makes American Tower less appealing than when I initially researched it, the company is still my preferred way to play the communications and broadcast tower industry as a long term investment. SBA Communications does not meet my initial screening as a suitable long term investment because of continuing net losses and weak long term returns on invested capital. Additional analysis may reveal that there is a short term catalyst or rational for buying the stock. Based on current share prices and expected earnings for 2013, current PEG multiples are very pricey, at more than 2x, for both American Tower and Crown Castle. Whats more, both companies’ estimated 2013 EPS growth rates are lower than the 2012 estimates and have declined for both companies since April. Because shares are more expensive than in April and the growth outlook is diminished, I would wait for a 5% or greater pullback to reassess shares of American Tower for any investment duration shorter than 1 year. Long term, the company is still dominating the business and is on track to capture more than its share of industry profits to increase intrinsic value for shareholders.
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