Don't Overlook the Cell Tower Stocks
It’s no secret that the cell phone business is still hot and there are plenty of ways to play it. The manufacturers like Apple (NASDAQ: AAPL) and Nokia (NYSE: NOK), the carriers—Verizon (NYSE: VZ) or AT&T (NYSE: T), and others like Level 3 Communications (NYSE: LVLT) that help to manage the massive flow of data are all well-known opportunities.
But there’s another way to play the space largely overlooked by investors. Next time you’re driving and you see one of those ugly, grey cell towers, start seeing green because those towers have a track record of producing cash for investors.
There are three names in the cell tower space. American Tower (NYSE: AMT) is the best known among investors. It operates more than 54,000 towers and logged gains of 1,400 percent since 2003. In the past 12 months, it’s up 24 percent.
It’s the favorite among investors, in part, because it’s kept its debt under control. At 3.8 times EBITDA, that’s three handles better than AMT's other two competitors, according to Morningstar. With a forward P/E of 29, it’s not cheap but not overvalued in the eyes of investors.
Then there are the other two in the space. Crown Castle International (NYSE: CCI) and SBA Communications (NASDAQ: SBAC). Crown Castle leads the pack in the amount of American cell towers with about 30,000. In a 2012 deal with T-Mobile, CCI purchased 7,100 towers at a significant discount ($2.4 billion) compared to other deals over the past five years. This ratchets up the company’s leverage to 6 times EBITDA but investors welcomed this along with other recent acquisitions.
CCI is up 30 percent in the past year but it’s expensive with a forward P/E of 66.
Finally, SBA Communications is the smallest of the tower names in terms of number of towers owned. It operates 16,500 towers throughout North, South and Central America and manages 5,000 sites for outside landlords. In addition to its portfolio of towers, it provides assistance to carriers that includes site identification and acquisition, equipment installation, and integration services.
The company acquired TowerCo in Q3 2012. This purchase added 3,256 towers in the U.S. and Puerto Rico while buying 800 towers from a Brazilian subsidiary. Brazil is the fourth largest country for cell use and is currently undergoing a massive build out for the 2016 Olympics.
SBAC is up more than 47 percent in the past 12 months but the company is not profitable.
Much like office space, owners of each tower lease space to carriers that strategically build out their networks for maximum coverage. Because the upfront costs of placing equipment on a tower are so high, it doesn’t make financial sense to switch to a neighboring tower if the cost to lease was lower. For this reason, the cash flow from the cell tower companies is consistent and reliable.
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