Credit Suisse: 3 Tower Companies Long-Term Investors Should Consider
In a report published Friday, Credit Suisse analyst Joseph Mastrogiovanni initiated coverage on three companies in the U.S. Tower Industry.
Optimistic Outlook for US Towers
Credit Suisse noted strong secular trends for the tower industry.
The analyst wrote, "The tower industry has several favorable characteristics that make tower companies attractive long-term investments, such as recurring revenue streams with long-term contracts, high operating leverage and a benign competitive environment. We believe the industry is poised to continue to see strong secular growth in the US and internationally owing to network upgrades, growth in data usage and spectrum auctions."
Mastrogiovanni noted near-term risk in the U.S. related to wireless mergers and acquisitions. Sprint (NYSE: S) began shutting down the Nextel network in 2013, and investors are noting higher churn this year and beyond. Sprint could also make an offer for T-Mobile (NYSE: TMUS) in 2014.
Despite this risk, Credit Suisse highlighted three drivers for organic growth over the next three to five years. Mastrogiovanni sees the stability and visibility of contracted rent escalators, which "guarantee" three to five percent cash in revenue growth.
In addition, the continuous network upgrades to "new wireless technologies, such as 3G and LTE, have historically required the carriers to upgrade their hardware equipment, leading to increasing amendment revenues for the tower companies."
The third driver emphasized that carriers continue to add capacity to their networks, including looking at the alternatives of adding small cells and macro towers.
"Taking all the above drivers into account, we forecast all 3 of the listed US tower companies to grow revenues organically by mid- to high-single digits over the coming 5 years with the potential for low double-digit growth in the near-to-medium term."
Mastrogiovanni initiated coverage on American Tower (NYSE: AMT) with a $101.00 price target. The analyst "prefers" American Tower as the company has the least exposure to wireless M&A activity and the most opportunity in growing international markets.
Credit Suisse commented, "We believe that the tower industry has the best fundamentals in telecom and is benefiting from positive secular trends. Compared to its peers, AMT is the best positioned because of its exposure to higher growth international markets (33% of revenue) and insulation from wireless M&A. American Tower gives investors an opportunity to participate in the long term secular growth and high operating leverage of the industry while shielding them from wireless consolidation risk."
The analyst initiated coverage on Crown Castle International (NYSE: CCI) with a Neutral rating at $84.00 price target.
Mastrogiovanni emphasized the risk from the company's exposure to iDen churn and wireless consolidation. Although Credit Suisse sees tremendous opportunity for shares of Crown Castle to appreciate in the long-term, the company has the highest exposure to US consolidation risk in the near-term.
Mastrogiovanni also rated SBA Communications (NASDAQ: SBAC) as Neutral and set a $110.00 price target.
Despite similar exposure to churn and consolidation risk, "SBA also has the potential to see the highest upside from continued network investments by Verizon and AT&T. That is because SBA has not signed Master Lease Agreements (MLAs) with these carriers. MLAs are contracts that specify the number of towers and equipment/tower, among other terms, that a carrier can deploy for a set price. Without these agreements, SBA has more flexibility to adjust pricing to respond to industry and economic developments."
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