Can You Hear Me Now? Good Signals for Cell Tower Cos.
Wall Street analysts are increasingly bullish on the cellular infrustructure industry. It's not too late for investors to dial in.
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The Fiscal Times
April 5, 2012

As long ago as the California Gold Rush, it became clear to some individuals looking to make money that providing the necessary tools and infrastructure was a safer bet than hunting for the nuggets of gold themselves.

That approach remains valid today when it comes to the growing North American addiction to mobile computing, from ubiquitous smartphones to soon-to-be-ubiquitous tablets like the iPad. Whether consumers choose to buy a phone from Apple (AAPL) or Samsung, and regardless of whether they sign up for a plan with AT&T (T), Verizon (VZ) or T-Mobile, part of Deutsche Telekom (DT), the one element that none of them can do without is the infrastructure that connects their devices to that carrier. In other words, their ability to download the latest version of Angry Birds or stream the just-aired episode of Mad Men on their brand-new device depends on the presence of wireless towers. Regardless of how much providers like Verizon are able to charge their customers in exchange for that bandwidth, they have to create a network that those customers are willing to pay for – and that means putting more antennas on more towers in more places across the continent.

Even before the release of the latest iPad – which reportedly causes its users to consume a lot more gigabits than they had expected, thanks to the 4G downloads – made its debut this year, the wireless tower industry was bracing for growth. Bad news for AT&T – the end to its plan to acquire T-Mobile, requiring a $4 billion breakup fee paid to the latter – will be good news for American Tower (AMT), SBA Communications (SBAC) and Crown Castle (CCI), all of which are acquiring both new assets (in terms of both land and towers) and a growing following among the Wall Street investment research community. Independent investment banking firm Evercore recently boosted its rating on SBA to overweight; Credit Suisse initiated coverage of SBA and a handful of its peers by publishing a research note in which the analysts called for the industry to outperform, citing strong demand, high barriers to entry and limited competition among their reasons for the bullish call.

There is no reason to disagree with that assessment. The industry is consolidating around a handful of players at a critical moment in its history, as smartphone addicts begin to realize that their current lifestyles are unsustainable out of range of one of these towers. Whether it’s sending a critical e-mail or paying a bill online via an iPhone – or even trying to navigate an unfamiliar neighborhood while taking your kid to a friend’s birthday party – reliance on these networks will only grow.

Investors have been underestimating growth for the group as a whole, the Credit Suisse research team concluded, and forecast that SBA’s stock price could hit $67 a share, up from just above $50 today, while American Tower could rise from its current $63 to $75. Meanwhile, Crown Castle has been added to the S&P 500 index.

Once the tower companies build their towers, they can expand the capacity of each simply by adding extra antennas or cell sites. That translates into what investment analysts like to call “operational leverage”: In other words, for a minimal up-front investment, American Tower or Crown Castle can begin collecting a stream of revenue from the likes of T-Mobile, which likely will have to funnel some of that $4 billion windfall into building its own 4G LTE network.

Just as the gold rush miners relied on the shopkeepers who sold them food, equipment and blue jeans to keep them panning for those elusive nuggets, so the wireless communication tower companies are likely to be big winners regardless of whether a particular smartphone model emerges victorious or is dubbed a lemon.

And the tower companies are in the catbird seat when it comes to the negotiations; this is one industry in which the consumer (i.e., the telecommunications service provider) doesn’t have much clout. All the pricing power resides in the hands of the tower companies, a fact that is already being reflected in their earnings and share prices. But while American Tower’s stock is up about 30 percent over year-ago levels, its fourth-quarter net income more than doubled.

Analysts acknowledge the stocks aren’t cheap, but unless Americans en masse decide to abandon their iPhones and iPads in favor of the postal service and the quill pen, the size of the business opportunity more than justifies the valuations.
e margin of error was plus or minus 4.9 percent.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.