Tower Wars: A Battle for Global Dominance

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With cell phones rapidly proliferating throughout the world and the technology used by those phones advancing at the rate of Moore's Law, the tower industry stands to benefit greatly.  In fact, it already has, and it's not done yet.

The three main publicly traded tower companies are American Tower (NYSE: AMT), SBA Communications (NASDAQ: SBAC), and Crown Castle (NYSE: CCI).  All three stocks have significantly outperformed the S&P 500 over the past four years (roughly from the market bottom in 2009).

What a more long-term view?  Below is a ten-year chart that shows all three companies soundly beating the S&P 500.  Not even close.

Cash flow business

Operating cell phone towers is a cash flow intensive business.  The companies lease or purchase land, build a cell phone tower on it, and then rent space on the tower to phone and data carriers (e.g. AT&T, Verizon, Sprint, T-Mobile) or anyone else needing to transmit a signal (radio, TV, government, etc.).  Towers will typically have multiple companies renting space on each tower.

Generally, debt is used to finance the capital activities of building a tower and purchasing or leasing the land.  The goal is to then rent out space on the tower for more money that you are paying on the loan to finance its existence.  Conceptually simple, but obviously the companies must execute and work through all regulatory, customer and financing challenges.

Domestic

Domestic organic growth for the tower companies is being helped by the push to 4G technology by the four major carriers (AT&T, Verizon, Sprint & T-Mobile).  This isn't necessarily a huge growth driver yet, but it does provide for additional income without the companies having to make a major CapEx commitment in a new tower.  This trend towards 4G should be a significant long-term, consistent growth driver for the industry.

What drives the domestic growth even more is simply an increase in new contracts, as more tower space is needed to handle all types of data and networks.  The good news for the tower companies is that it's not a zero-sum game.  This rising tide lifts all ships in a significant way.

International

International is a bit more of a battle between the tower companies because it represents a newer frontier.  There is still plenty of room for all three, but obviously each company wants to get in an establish themselves as heavy hitters in the less-developed markets.  Countries like India, Brazil, Mexico and South America (just to name a few) are prime opportunities for the tower companies to expand significantly.  These expansions will take time, but will produce significant long-term profits if the companies execute well.  Only Crown Castle doesn't seem to be in the international game just yet.  American Tower and SBA Communications are already headed down that path.

REIT's and dividends

American Tower has converted itself to a REIT (Real Estate Investment Trust), which allows the company to avoid federal taxation at the company level as long as it pays out 90% of its profits as dividends. (These obviously get taxed at the shareholder level).  Crown Castle and SBAC may be headed in the REIT direction as well, but first need to utilize their NOL (Net Operating Loss) tax carry-forwards before it makes much sense to spend the time converting to a REIT and paying dividends.  In all three cases, the company is not paying any federal taxes.  Currently, only American Tower is paying out a dividend: 1.3%.

The bottom line

You likely can't go wrong with any of these three tower companies.  The only problem lately is that they've provided us with only a few small pullbacks as buying opportunities.  If the market sells off, these would be great stocks to buy.

Of the three, I prefer American Tower.  It's the most mature (although Crown Castle is plenty large as well), it pays out a nice 1.3% dividend, and it has a big international opportunity developing to go along with its already robust domestic business.


Dave Zaegel 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!

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