American Tower - a Better Way to Play Cellular
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A new round of speculation has been brewing about Finnish cell phone giant Nokia's (NYSE: NOK) future. This speculation surrounds the core question of the company's ability to survive. All of Nokia's problems at present fall upon one single fact: It has relied (and continues to rely) on its proprietary Symbian operating system for far too long. I have owned many Nokia Symbian phones over the years and always liked them, until I tried my first phone running on Google's (GOOG) Android operating system. I am sure I am not alone in my conclusion that once one tries an Android or an Apple iPhone platform, Symbian will never become more than a fond, yet anachronistic memory.
Nokia hired a new CEO in late 2010, Stephen Elop. After being inside the company for a few months, he wrote a memo that impeccably diagnosed the problems ailing Nokia, and suggested some ideas for recovery. I highly suggest you read that memo in full.
In the memo, Elop likened Nokia's situation to a North Sea oil platform that has had explosions and caught fire in multiple locations. One fire is Apple's control of the high end ($300 plus) cell phone market. Another fire is that Android controls much of the middle market. Specifically, Elop wondered how, since the first Android devices were sold in 2008, the system could have overtaken Nokia by 2010. And a third fire is that China Mobile Media Tech (CHMO) has designed chip sets for a slew of inexpensive Chinese made cell phones. Elop also cited the technical and engineering expertise of Nokia to find its way forward.
Well, things have not gotten better since 2010 for Nokia. Rather, they have gotten much worse. The company is burning though cash, most recently to the tune of $700 million per quarter. Moody's (MCO) today lowered Nokia bond ratings deeper into junk status, and lowered its commercial paper to non-prime status. Consider those moves, along with a stock price at a low for the 21st century, and this has all the appearances of a flailing company with no real future. While the situation is bleak, I do not believe it is necessarily as morose as it seems.
Nokia is not much of a player in the United States, especially outside of AT&T wireless stores where its Lumia 900 receives Microsoft (NASDAQ: MSFT) subsidies and tremendous advertising support. Its tens of millions in annual phone sales are largely in developing countries, where the Symbian system, antiquated to us, is happily accepted. But, of course, the profit margins on lower cost Symbian phones in third world countries do not help the bottom line very much.
So, where is Nokia to go from here? Microsoft has for years been itching to get into the cell phone market, and Nokia is the horse it chose to ride. Could Nokia be a natural acquisition by Microsoft? It reportedly considered doing so back in January, but promptly backed out. Elop is committed, it appears, to "saving" Nokia by cutting costs, and last week the company announced 10,000 layoffs as part of a $1.3 billion expense reduction plan. Will that put even more pressure on Nokia's ability to catch up with Apple and Google?
In all, there are too many questions for me to see Nokia's future as anything but opaque. I cannot see anyone but those who actively crave risk being interested in this equity.
The two big, profitable public companies in this sector are AT&T (T) and Verizon. But neither of these is a pure cellular play, as both own large, shrinking land line divisions. But one other sector of the cell phone industry, cell phone tower companies, is an excellent way to bet on the wireless industry in general. The biggest, and in my opinion the best, of these cell phone tower companies is American Tower (NYSE: AMT).
American Tower owns about 45,000 cell phone towers, about 45% of which are in the United States, with the balance spread among Central and South America, Europe, Asia, and Africa. Large, institutional lessors such as AT&T, Verizon, T-Mobile, and Sprint-Nextel (S) supply about 75% of American Tower's revenues. This offers American Tower tremendous stability, and sure enough, its operating margins have been between 60% and 65% each and every year since 2005.
American Tower has reorganized itself into a REIT, which means its income tax obligation will fall to zero, as long as it pays dividends of at least 90% of income. The large, macroeconomic trends toward ever more powerful and sophisticated communications devices both domestically and overseas augers well for American Tower's future.
American Tower's revenues and profits have been on a tremendous run the past few years. Its revenues specifically have increased an average of over 13% annually in the last five years, which is especially remarkable since several of those years were recessionary. The company now carries a highly optimistic mean analyst rating of 1.7, and those same analysts foresee earnings growth averaging 18% the next five years.
What American Tower offers, more than almost any other company out there, is a near assurance of rising dividends as that payout rises to meet REIT standards. I think this is an excellent play for income seekers.
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