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The Tower’s Growth

February 27, 2014 | About:

The wireless communication industry has grown at balanced levels over the past few years, offering investors a great margin for solid investment. The impressive rise of smartphone devices and general data-centric mobile devices provoked an upgrade requisite for new developed networks – like the recent 4G deployments demonstrate.

In this regard, SBA Communications Corp. (SBAC) generates most of its revenue from wireless tower leasing and line network development assessment to providers. Upgrading conditions are different in the tower leasing sector, which offers investors valuable attributes. Based on long-term contracts and ownership of tower sites, certainty and minimal risk exposure give SBAC a noteworthy economic moat.

New Frontiers

This firm faces some challenges, such as increasing dependency on the top four wireless carriers in the U.S. This could lead to a difficult situation if disruption of spending or leasing occurs. In fact Sprint Corp Series I (S), representing 6% of SBAC’s revenue, is under great pressure of being decommissioned. Another challenge is the current debt burden and the threat of interest rate increases, which would put our tower player in financial problems.

Nevertheless, SBAC is challenging these obstacles by opening up to new investment opportunities. The benefits of investing abroad and globalization mark the company’s path, as seen in new trade agreements with the Brazilian telephone firm Oi SA (OIBR). This new investment adds 15% to the firm's tower portfolio, exceeding the 20,000 sites mark. In addition to these asset investments in a promising emerging country, SBAC has considerable participation in Central America and Puerto Rico.

Stakeholders should take into consideration that the Brazilian agreement isn’t superficial in terms of participation levels. It includes SBAC’s ownership of assets in a vast emerging market with huge growth prospects.

A View on Financial Status

Although SBAC traditionally bears a considerable debt burden, its cash flow levels and operating margin are not only increasing compared to industry, but also relative to its own historic values. Given the high switching costs carriers have, this sector receives significant moat benefits when operating margins are wide. SBAC shows a positive tendency between its free cash and its operating margin, which are at 15.4%, compared to the 11.21% industry average. At the same time, the firm’s revenue growth stands at 18.7% which exceeds the industry median by 92% and its own 10-year historical record. These metrics show a great contrast to debt burden preoccupations.

A quick view of some earning metrics such as EBITDA and EPS shows us a similar tendency. Having an EPS growth of 8% compared to the industry average of -1%, or the 19.9% EBITDA rate, which far exceeds the market’s 1.3%, makes me feel quite optimistic regarding expected long-term returns.

Feeling Bullish on Solid Investment

Following some major gurus' investments in SBAC, I would like to highlight Steve Mandel (Trades, Portfolio)’s new buy of almost 5.5 million shares, representing an impact of 2.1% of his firm’s portfolio. Another major guru on the scene is George Soros (Trades, Portfolio), which after a timid entrance in 2012 is now owner of almost 1 million shares.

It is clear that SBAC has chosen its international expansion moves carefully and shown concern for shareholder’s interests. The firm’s tendency to enact share buy-back operations, the easing of interest rates which facilitate debt reductions, and its international expansion, gives stakeholders a wide spectrum of options. Confident by these elemental trends, and the stock’s current undervalued price, SBAC has attractive long-term prospects and is a solid investment option.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


Rating: 5.0/5 (2 votes)

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