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American Tower – Highest Quality REIT

December 14, 2011 | About:
Federico Flom

Federico Flom

6 followers
American Tower (AMT) is one of the largest independent operators of wireless and broadcast communication sites. The company operates more than 37,000 tower sites in the U.S., Latin America, India and Africa.

Tom Bartlett, executive vice president and CFO said in this regard, “We are experiencing strong demand in our international markets. In Latin America, for example, recent spectrum auctions are enabling our customers to launch 3G networks, and their initial overlay deployments are underway.”

American Tower's largest customers are wireless carriers, including AT&T, Sprint Nextel, Verizon, and T-Mobile USA.

Positives and Risks

The firm is expected to represent 45% of its tower portfolio in international markets in 2011. This increases diversification and boosts its growth profile. In addition, its REIT structure will allow the firm to pay its taxes more efficiently without compromising its growth prospects.

American Tower has the longest contracts in the sector, giving them heightened visibility and less operating volatility.

However, there are certain risks that the company may face, namely:

  • Changes in consumer demand for wireless services, next-generation technology deployments, or zoning and environmental regulations

  • Wireless carrier consolidation, debt service obligations, and emerging-markets risk
These two macro risks are manageable, in my opinion.

American Tower has consistently outperformed its peers in terms of profitability. Generally speaking, tower companies have the same basic operating model. These firms own wireless broadcast towers and lease them out to telecommunication operators on long-term contracts that escalate in price by 3%-5% per year.

Despite the operations in the same environment, American Tower's operating margin easily exceeds those of rivals Crown Castle CCI and SBA Communications SBAC. The ability to expand its operating manager involves a solid job on the part of American Tower regardless of its rapid tower base growing into markets with lower tenant-per-tower.

The firm's focus on operating efficiency has helped it establish the sector's lone economic moat.

American Tower is very attractive thanks to its international perspective, particularly now that the U.S. economy is tumbling. The penetration rates in Latin America, Africa and India are still well below the level seen in the U.S. This leaves a growth margin.

Last quarter results

Group revenue reached 22% vis-à-vis a year ago to $630.4 million bringing the nine-month total to 75% of our full-year estimate.

The growth continues to be primarily driven from the expansion of its tower portfolio, which grew by 20%.

The international division is the primary vehicle of growth for the company and has increased more than 47% year over year. The firm continues with its expansion in India and Brazil, but now the highest growth comes from Ghana and South Africa.

The 12% year-over-year growth in EBITDA was in line with expectations, but the resulting 59% margin marked a multi-year low.

Improved profitability and limited capital expenditures in recent years have led to meaningful free cash-flow generation. Management is returning excess cash to investors through an aggressive stock-repurchase program.

Valuation

My fair value estimate for American Tower is $66 per share, matching a P/FFO multiple of 17.5 times for 2012. The company will trade at a premium to the REIT sector given its emerging market growth prospects, cash flow visibility, and lower leverage. Revenue is expected to increase at a 10% annual growth rate through 2015. Margins should continue to expand as costs increase at a slower pace.

Leasing trends from carriers that are upgrading their networks to 4G and the demand for smartphones will boost growth.

“We expect that our new markets will begin to contribute in an even more meaningful way to our commenced leasing activity, driving higher levels of new business on a consolidated basis. Further, we've made some significant investments this year, which we believe will generate meaningful incremental revenue in 2012,” concluded Tom Bartlett.

Management

James Taiclet was appointed CEO in October 2003 and chairman in February 2004. Taiclet has improved the balance sheet through debt reductions and increased financial flexibility.

In 2006 the Securities and Exchange Commission carried out a review where it found discrepancies in historical option-granting practices. The company restated its financial results back to 2003, and the additional stock-compensation expense had a modest impact on the bottom line.

Guru Sponsorship

American Tower is held by prominent Gurus, which are listed in the table below.

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Rating: 4.2/5 (5 votes)

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