Contributing editor Glenn Rogers is with us this week to recommend a relatively unknown company that is part of the backbone of the telecom sector. Glenn is executive chairman of RAEN and a board member of Poler Inc. He has worked with private equity and venture groups on a variety of projects leading to successful exits for the investors. He recently was part of a group that sold a large beverage company to Amway. Glenn has worked in senior positions in both Canada and the U.S. and is a successful investor. He lives with his family in southern California. Here is his report.
Glenn Rogers writes:
The last couple of weeks have been great for the stock market and it was a rally that most people did not see coming. But now we find ourselves with a tape that looks ready for another pullback to see if we can test the lows of the most recent correction. I mention all this because it makes me cautious to recommend any stock that may suffer too much in the event of a retreat. I guess you could say that just about any pick, except high momentum stocks, usually gets taken out to the woodshed first, so this month I’m recommending a fairly stable dividend payer that should be less susceptible to falling off a cliff.
Many investors hold shares in one of the major telecom providers like Verizon and AT&T in the U.S. or Bell and Rogers in Canada. However, most of the big carriers have experienced slowing revenue and increasing costs as consumers use more and more data. Because of fairly robust competition, the ability of carriers to raise prices has been limited. Recently, Barron’s wrote an article recommending the three cell phone tower stocks that provide the backbone for the wireless telco carriers here in the U.S. One offers some international exposure as well. It’s an alternative way to play our ongoing fascination with mobile gadgets and our increasing proclivity to consume more data through streaming video content and music.
The three main players in this sector are American Tower (NYSE: AMT), Crown Castle International (NYSE: CCI), and SBA Communications (NYSE: SBC). All are interesting for different reasons. American Tower gives you international exposure with towers in Latin America, India, Germany, and South Africa, as well as in the U.S. Crown Castle pays a 4.1% dividend and its focus is on major U.S. markets. SBA is the smallest of the group but has been the fastest grower.
In terms of size AMT is the giant with nearly 100,000 towers, CCI is second with 40,000, and SBA has 25,000 sites. If you want to avoid emerging markets and their currency risks, CCI and SBA are the best choices.
As I said, all three are all interesting but I decided to focus on CCI because of its healthy dividend payout. Both AMT and CCI converted to REITs in 2014 so must pay out 80% of their profits to their shareholders. SBC will likely convert as well once it runs through its current tax losses.
All three are basically utility companies with less regulation but a smaller customer base. There are four main customers: Sprint (S, Financial), T-Mobile, Verizon (VZ, Financial), and AT&T (T, Financial). The federal government will likely be launching an emergency network called First Net that will also require tower space. That’s the bad news but the good news is that these customers really are captive and will have increasing data needs for the foreseeable future. Mobile search has surpassed desktop search and continues to expand at a rapid rate and customers expect ever-faster connection speeds, which is good for CCI but not so good for the telcos. Of course, the major growth is primarily in the urban areas and that’s where 70% CCI’s footprint is located.
CCI recently sold its stake in its Australian subsidiary to raise capital to support its U.S. activities so if you like a stock focused on U.S.-only activities this is one for certain. The company also completed the acquisition of Sunesys, which is a major fibre optic provider with over 10,000 miles of fibre optic cables. They help support the company’s small cell network that is deployed in major urban venues like sports stadiums and universities.
The second quarter financial report was so-so with both revenues and earnings coming in below consensus estimates. However, the company raised guidance for the full year, expecting net income of $1.463 billion to $1.542 billion ($4.38 to $4.62 per share, figures in U.S. dollars). At that point, it appeared the quarterly dividend of $0.82 per share should be safe and could get raised.
On Oct. 21, CCI did exactly that. In releasing third-quarter results, the company announced an 8% dividend increase to $0.885 per quarter ($3.54 annually), effective with the Dec. 15 payment. The previous quarterly payout was $0.82 per share.
The Houston-based company posted strong results, exceeding the high end of its earlier outlook for site rental revenues, adjusted EBITDA, and adjusted funds from operations (AFFO). The latter, which is a key metric for businesses of this type, came in at $356 million ($1.07 per share), up 7% from the same period in 2014.
Based on the third-quarter numbers and the Sunesys acquisition, CCI increased the mid-point of its full year 2015 outlook for site rental revenues, adjusted EBITDA, and AFFO by $60 million, $37 million and $23 million, respectively. It also provided a mid-point 2016 outlook for AFFO per share of $4.66, representing year-over-year growth of 8%
The market reacted positively to the results, sending CCI shares higher on Thursday.
The main risks for the company are a high debt load and the aforementioned customer concentration. The credit rating was recently upgraded by S&P to BB+, which should keep borrowing costs down. This is not a high growth business but it is steady, generates lots of cash flow, and pays you to wait.
Action now: Buy with a target of $90. The shares closed Friday at $85.32.
