American Tower Report

8/10/2019 American Tower Report

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American Tower

Corporation (AMT)

Recommendation

While American Tower Corporation is theindustry leader in a rapidly growing industry, which is

evident from AMTs five-year revenue growth of 19.53

percent, AMT is not undervalued at this time. The

wireless tower industry will continue to expand over the

next decade because of a push for more towers to

accommodate the move to smartphones and

international growth in emerging markets. AMT is

positioned to capture much of this expansion because

of superior operating management, the strongest

financial statements in the industry, and the most

geographic diversification. Still, the DCF model provided

an intrinsic value of $23.72 when using a ten-year beta

and $31.38 when using a more appropriate for the

company seven-year beta. Many analysts recommend a

Buy rating for AMT with the consensus fair value at

$49.91. Since AMT traded at $44.19 as of 7-18-10, it

does not appear significantly undervalued even by

analysts at the time.

Company Profile

American Radio System Corporations created

American Tower Corporation in 1995 as a subsidiary and

AMT became a freestanding company in 1998. AMT is

one of the leading wireless and broadcast

communication companies and it develops, owns, and

operates communication sites. These include wireless

Ticker: AMT

Sector: Telecommunications

Industry: Diversified

Communication

Services

Recommendation: DONT BUY

Pricing

Closing Price $44.19 (7-18-10)

52-wk High $47.21 (7-8-10)

52-wk Low $30.85 (9-2-09)

Market Data

Market Cap $18.4BTotal assets $8.5B

Trading vol. 3.4M

Valuation

EPS (ttm) $0.70

P/E (ttm) 66.20

PEG 2.3

Div Yield -

Profitability & Effectiveness (ttm)

ROA 3.34%

ROE 8.70%

Profit Margin 16.06%

Oper Margin 39.60%

Gross Margin 75.98%

ANALYST NAME

David Thiessen

[email protected]


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towers, broadcast towers, and distributed antenna system networks. As of the end of

the fiscal year 2009, AMT had approximately 19,800 towers in the U.S. and 7,000 more

towers in Brazil, Mexico, and India. Most of AMTs business comes from leasing antenna

space on the towers to wireless communication companies and radio and television

broadcast companies. These wireless communication companies include AT&T, Sprint,

and Verizon. AMT chooses to focus on the leasing of antenna space compared to thenetwork development services because of higher operating leverage and low cash flow

volatility. The rental and management segment had an operating margin of 72.7 percent

in 2009 compared to 31.4 percent for network development. This focus has allowed

AMT to realize greater margins compared to its competitors. Also, AMT operates mostly

in the U.S. with 85 percent of revenue coming from the country but is focusing on

expanding geographically, mainly to Brazil and India. Since AMTs main business comes

from leasing of space, it plans on converting to a REIT sometime around 2012 when it

has no more Net Operating Losses (NOLs). This should help AMT from a tax standpoint.

Operating Segments

This segment accounted for 97 percent of revenue in 2009. Within this segment

are four sub-segments: wireless communication towers, broadcast communication

towers, DAS networks, and rooftop management.

Rental and Management

Wireless communication towers refer to the leasing of space on towers to

wireless communication companies. In 2009, wireless communication towers accounted

for 94 percent of total revenue. As of 2009, AMT had 19,800 towers in the U.S., 2,600

towers in Mexico, 1,600 towers in Brazil, and 2,600 towers in India. Customers to these

towers include: AT&T, Verizon, Sprint, America Movil, Nextel, Vodafone, and Telefonica

to name a few. Of these customers, AT&T, Verizon, and Sprint accounted for

approximately 19 percent, 18 percent, and 15 percent of total revenue. Leases are

usually initially non-cancelable for five to ten years and then tenants have the option to

lease for five-year renewal terms. Also, lease payments automatically increase three to

five percent per year to cover costs from inflation. As of December 2009, AMT had

average tower occupancy of 2.4 tenants and each tower can hold up to four tenants.

AMT also owns 230 broadcast towers in the U.S. and 200 in Mexico. These

towers, which are taller, more complex, and more expensive, are leased to radio and

television broadcast companies. In 2009 this segment accounted for six percent of

revenue. DAS networks are smaller wireless networks for malls, casinos, and other

buildings. AMT has approximately 200 DAS networks and they account for one percentof revenue. Finally, AMT also operates and leases rooftop antennas in places where this

technology is feasible. This only accounts for approximately one percent of revenue.


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AMT offers services such as site acquisition, zoning and permitting services, and

structural analysis services through this segment. In 2009 it accounted for only three

percent of revenue and is not a main focus for AMT.

Network Development Services

Wireless Growth Potential

Much of the excitement for the telecommunications industry comes from the

strong wireless communication growth potential, particularly overseas and in data

plans. Currently the U.S. has a wireless penetration of 89 percent, which measures the

number of subscribers as a percentage of total population. Keep in mind that Argentina

has a wireless penetration of 115 percent, so the U.S. will likely go over 100 percent in

the future. Still, the growth of subscribers is slowing down in the U.S.

AMT sees growth potential in smartphones, data plans, and emerging markets.

As of December 2009, there were 120,000 towers in the U.S. with AMT operating 19,600

of them. The largest operator, Crown Castle International Operations, had 22,000 sites.While AMT is expanding its number of U.S. towers, it focuses more on maximizing

profits from each tower. AMT estimates that the U.S. has a smartphone penetration of

30 percent and thinks this could double by 2013. This is significant because data plans

accounted for $33 billion of the $39.1 billion increase in revenue for wireless companies

from 2005 to 2009.

Much of the growth in telecom will come from emerging markets, namely India.

As of June 2009, India had 427.3 million subscribers and this is expected to grow to near

737 million by 2012. Also, because of cheap mobile call tariffs, many Indian mobile

companies are seeing margins decrease, which has led to more tower sharing and

leasing. This benefits the tower companies because towers have fixed costs and most of

the rent from each additional tenant goes through to operating profit. Also, AMT

purchased Indias Essar Telecom Infrastructure Pvt. Ltd. for $432 million in cash in

February 2010, which brought AMTs number of towers in India to nearly 7,000 and

made it the second largest independent tower company in India. The deal should

increase AMTs foreign revenue from 15 to 21 percent. The largest independent tower

company in India, GTL Infrastructure, recently beat AMT in a bid for 50,000 towers from

Reliance Communication. GTL now has 80,000 towers in India. AMTs largest U.S.

competitor, CCI, does not currently own any towers in India but is exploring options.

Finally, AMT purchased 287 towers in Chile during Q2 of 2010.


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SWOT Analysis

Better operation management

Strengths

o Tower companies operate in similar fashions but AMTs operating marginof 39.6 percent is ahead of CCIs 27.1 percent and SBA Communications

Corporations 10.1 percent. Not only does AMT have higher revenue in its

rental business segment than its competitors, it spends less

comparatively. For example, rental site operating costs for AMT in 2009

were 23 percent of rental site revenue, while for CCI they were 29.6

percent. Analysts attribute this to better tower selection and an emphasis

on added tower tenants as opposed to simply adding towers, which have

high fixed costs. The revenue from each new tenant flows mostly to

operating profits since they do not bring much added costs. Also, AMTfocuses more on its rental business, which has higher margins than

network services, than either competitor.

Geographic diversificationo AMT has the second most towers in the U.S. but has a stronger

international presence than any of its competitors, which is important as

the wireless growth in U.S. slows down but is still strong elsewhere. In

particular, AMT has begun to expand to India ahead of both CCI and

SBAC. AMTs strongest competitor, CCI, only has towers outside of the

U.S. in Canada and Australia, two places that have strong wireless

penetration and do not show as much growth potential as emerging

markets. By moving into Chile, India, Mexico, and Brazil ahead of itscompetition, AMT is better protected from any slowdowns in the U.S.

and is better positioned to capture growing revenues in these emerging

markets.

Financial stabilityo The independent wireless tower companies are all relatively young,

coming into existence in the 1990s, meaning they are still finding their

footing financially. Of the three main U.S. independent tower companies,

AMT is the most financially stable. Back in 2002 this was not the case,

with AMT losing over $1 billion and nearly going out of business. Since

then, AMT has divested some non-core business lines and is the only oneof the three to turn a profit. CCI had a loss of $114 million in 2009 and

SBAC had a loss of $140 million. AMT also operates with significantly

lower leverage, giving it better financial flexibility.

Few customers

Weaknesses


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o The four main wireless carriers in the U.S. (AT&T, Verizon, Sprint, T-Mobile) account for 61 percent of AMTs revenue. This means that the

customers have power over AMT in negotiations. If AMT were to lose any

of these four customers, it would substantially hurt AMTs revenue.

Further, any consolidation among these companies would likely lead to a

reduction of leases because of redundancy from overlap. Also, fivepercent of revenue came from Grupo Iusacell, which operates Iusacell

Celular and Unefon in Mexico. This makes AMT susceptible to currency

shocks.

No product differentiationo There is no real differentiation among the wireless tower companies as

far as products go. All three of them lease similar towers with similar

terms. This makes it hard for AMT to achieve above average returns since

it cannot differentiate on the quality of its product. Most of the

differentiation must come from a management perspective and any

advantage could disappear with management turnover.Opportunities

India and emerging markets.o One of AMTs biggest opportunities comes from expansion into emerging

markets, specifically India. With the wireless penetration in the U.S.

nearing 100 percent, the number of new subscribers each year will

decrease. Meanwhile, emerging markets like India have substantial room

for growth. India is expected to double its subscribes from 2009 to 2012.

While AMT does have to compete with foreign wireless carriers and

foreign independent wireless tower companies, it is ahead of its U.S.

competition in expanding abroad.

Smartphoneso Most of the growth in the U.S. market is expected to come from the

movement towards smartphones, which allow the user to access e-mail,

surf the Internet, watch movies, take pictures, listen to music, and much

more. These activities require more network space and wireless

companies are pushing to expand to 4G networks. As of June 30, 2009,

data revenue accounted for 27 percent of total service revenues for

wireless service providers. Also, AMT expects the smartphone

penetration in the U.S. to double from 30 percent to 60 percent by 2013.

Competition

Threats

o AMT faces strong competition not only from SBAC and CCI but also fromthe wireless carriers themselves. The three main independent wireless

tower companies operate roughly 40 percent of the wireless towers in

the U.S. with the rest operated by the carriers and smaller independent

companies. While it is easier for the carriers to expand their market by

leasing through the independent tower companies, the carriers to

present a threat since they are much larger in terms of revenue and could


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potentially move their business away from the wireless tower companies.

Also, since the tower companies have little differentiation in terms of

product, the competition is strong.

Carrier Consolidationo While there is not much threat of the four major carriers consolidating,

analysts do expect them to acquire some of the smaller carriers in theU.S. This hurts tower companies because consolidation means fewer

companies to lease to. Usually there is some overlap of where the parent

company and the acquired company operate and this results in

terminated leases. The tower companies benefit from an increased

number of carriers because then there are more tenants per tower,

which substantially increases profit.

Competitors

There are only three main independent tower companies in the U.S. AMT, CCI,and SBA Communications Corporation. These companies also compete with the wireless

carriers who also have towers. However, independent towers are considered the

preferred option if a wireless carrier has to lease a tower since it does not want to lease

from a carrier competitor.

Relative Valuation TTM

AMT CCI SBAC

Market Cap $18.40B $11.10B $4.0B

Revenue $1.77B $1.73B $568M

Gross Margin 76.00% 67.70% 67.80%Op Margin 39.60% 27.10% 10.10%

Profit Margin 16.06% -15.35% -28.20%

ROE 8.70% -9.70% -28.2%

ROA 3.34% -2.49% -4.98%

Asset TO 0.21 0.16 0.18

Financial Leverage 2.51 3.93 5.83

Diluted EPS $0.70 -$0.92 -$1.37

P/E 66.20 -45.00 -25.4

P/CF 20.80 20.40 19.3

Current Ratio 1.94 1.30 1.33AMT = American Tower Corporation

CCI = Crown Castle International Corporation

SBAC = SBA Communications Corporation

Of the three companies, AMT clearly has the strongest financial ratios and

margins. In fact, both CCI and SBAC have negative profit margins, ROE, ROA, and EPS.

While there is very little differentiation among the actual product, since the companies


7/13

lease nearly identical towers, analysts attribute AMTs superior margins to a better

focus on utilizing tower space. While AMT does expand its number of towers, it has

done a better job at determining how many to add. The costs for each new tower are

high but fixed. Since AMT has done a better job at utilizing its tower space, it has better

margins. Also, while AMT does utilize some amount of leverage, it is considerably lower

than its competitors, giving it a more stable balance sheet and better access tofinancing. Further, AMT is the most diversified geographically with towers in the U.S.,

Mexico, Brazil, and India. CCI, for example, only has towers in the U.S., Australia, and

Canada. Of the three companies, analysts prefer AMT, with Morningstar analysts

considering AMT the only company in the industry with an economic moat.

Analysts Opinions

AMT CCI SBAC

Buy 6 4 4

Buy/Hold 8 8 8

Hold 4 6 4

Weak Hold 0 0 0

Sell 0 0 0

One-Year Comparison

Five-Year Comparison


8/13

Relevant News and Info

AMT expanded into Chile in Q2 with the purchase of 287 towers. This is part ofits plan to expand into Latin America. It already has already has a presence in

Mexico and Brazil.

Good

In February of 2010, AMT purchased Indias Essar Telecom Infrastructure Pvt.Ltd. for $432 million. The deal increased its towers in India from approximately

2,500 to 7,000 and made it the second largest independent tower company in

India.

Analysts, such as James Ratcliffe from Barclays Capital, view the futureconversion to a REIT as a positive. Ratcliffe estimates that American Tower is

trading at 15.5 times projected 2011 funds from operations, which is below theREIT average of 16.4 times. Further, he expects AMT to grow FFO faster than

other REITs.

The executive vice president of finance, Jean Bua, announced that she is leavingthe company at the end of September 2010.

Bad

Horse-Shoe capital filed a lawsuit worth $100 million against AMT in June 2010regarding a breach of contract in regards to the sale of XCEL Telecom, an Indian

wireless tower company, to AMT in 2009.

Valuation

Discount Rate:

Beta = 1.467 Risk-Free Rate = 3% Market Return = 11%

K = 3% + 1.467(11% 3%)

K = 14.74%


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SECOND STAGEResidual ValueFree Cash Flow in year 10 $1,924.3Second Stage Growth Rate (g) (add) 4.00%

Free Cash Flow in year 11 $2,001.3Capitalization rate (k-g) 10.74%Value at end of year 10 $18,640.83

Present Value of Residual $4,714.85Intrinsic Value of Company $9,653.01

Shares outstanding assuming dilution 406.9Intrinsic Value per share $23.72

AMT has a ten-year beta of 1.467, yielding a discount rate of 14.74 percent.

Since AMT is in a high-growth industry and the industry leader, the Bloomberg

consensus growth rate is 22 percent while Reuters provides a growth rate estimate of

18 percent. Wanting to be a little more conservative, I used 18 percent for my first stage

growth and then four percent as my terminal growth rate since. This provides an

intrinsic value of $23.72, which is more than $20 below the current price.

The consensus analyst target price for AMT is $49.91 and Morningstar analysts

provide a fair value for AMT of $48. This made me wonder if my assumptions were

correct. After looking more at AMTs stock history, its clear that a ten-year beta is not

the most appropriate beta. AMT traded for under a dollar in 2002 and nearly went

bankrupt. Since then, AMT has had a beta between 1.12 and 1.18, which is its seven-

year beta. That is a more appropriate value since the company has become significantly

more stable since 2002 and has consistently had a steady beta over the last seven years.Using 1.18 as my beta and keeping the same growth assumptions, the DCF model

calculated the following:

Residual ValueFree Cash Flow in year 10 $1,924.3Second Stage Growth Rate (g) (add) 4.00%Free Cash Flow in year 11 $2,001.3Capitalization rate (k-g) 8.45%Value at end of year 10 $23,689.38

Present Value of Residual $7,328.86

Intrinsic Value of Company $12,769.82

Shares outstanding assuming dilution 406.9Intrinsic Value per share $31.38

The intrinsic value of $31.38 is still more than $10 below the current value.

Looking more at analysts reports on the company, Morningstar used a discount rate of

ten percent while JP Morgan used a discount rate of eight percent. Further, Reuters


10/13

provides a beta of 0.78 for AMT. While I think this beta is too low, when I used it in the

DCF model the intrinsic value was $54.25. To me this indicates that analysts see AMT as

a lower risk than what its historical beta indicates.

Financial Statements


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Bloomberg Terminal

Sources

S&P Net Advantage

Yahoo Finance

Morningstar

AMT 10-K

www.cita.org

http://www.televisionbroadcast.com/article/103220

http://online.wsj.com/article/SB10001424052748704293604575342854039806646.htm

l?mod=googlenews_wsj
http://www.cita.org/http://www.cita.org/http://www.televisionbroadcast.com/article/103220http://www.televisionbroadcast.com/article/103220http://online.wsj.com/article/SB10001424052748704293604575342854039806646.html?mod=googlenews_wsjhttp://online.wsj.com/article/SB10001424052748704293604575342854039806646.html?mod=googlenews_wsjhttp://online.wsj.com/article/SB10001424052748704293604575342854039806646.html?mod=googlenews_wsjhttp://online.wsj.com/article/SB10001424052748704293604575342854039806646.html?mod=googlenews_wsjhttp://online.wsj.com/article/SB10001424052748704293604575342854039806646.html?mod=googlenews_wsjhttp://www.televisionbroadcast.com/article/103220http://www.cita.org/

Documents

American Tower Report