At press time (16 of March 2021), the stock market has registered a high level of volatility with the Nasdaq closing positive one day and negative the other. Despite this, American Tower Corp. (NYSE: AMT) and maintaining our target price of $300. The company’s wireless towers have become even more necessary for media and telecom tenants during the coronavirus pandemic, as more people stay home and use more data. Tenants are charged annual lease rate increases and AMT’s infrastructure dominates the market. We expect mobile data usage to grow 40%-50% annually over the next five years, which should increase the demand for tower leases. AMT has a solid record of growth and profitability, and stands out among publicly traded tower operators based on its size, margins, FFO growth rate, and high-quality assets. We also like its international expansion efforts.
As reported by one of the leading stock news portals beststocks.com, AMT operates with relatively low cash flow compared to debt, and debt/capitalization runs above 80%.
We think AMT is one of those stocks.
1. Recent Developments
The beta on AMT shares is 0.45.
For 3Q20, consolidated AFFO increased to $924 million, up 14.7% from 3Q19, driven by strong tenant demand to densify networks and enhance broadband connectivity. Consolidated AFFO per share rose 15.5% to $2.23, above the consensus estimate of $2.08. NAREIT FFO fell 2.9% to $874 million, due to impairment add-backs that boosted 3Q19 earnings, but did not recur in 3Q20. Revenue rose 3.0% to $2.01 billion, above the consensus forecast. Property segment revenue rose 3.4% to $1.99 billion. Adjusted EBITDA rose 5.6%.
Along with its earnings report, management increased its 2020 consolidated AFFO guidance to $3.72-$3.77 billion from $3.63-$3.71 billion. The forecast implies a year-over-year increase of 6.4% at the midpoint of the range, and assumes solid results in the company’s core businesses, favorable net interest expenses, and continued capital spending. Management’s projections also assume positive contributions from international tenant billings, offset by expectations for higher customer churn. The company also projects FY20 capex of $1.1-$1.2 billion, included in which is the construction of 5,000-6,000 communication sites; EBITDA of $5.075-$5.125 billion; and net income of $1.855-$1.905 million.
The lower profit reflected lower crude oil price realizations and the impact of production curtailments that began in 2Q20. Revenue fell 22% from the prior year to $1.815 billion.
Total crude oil production fell 7% to 200,670 boe/d due to curtailed production. We note, however, that the company has now resumed all drilling activity.
For the third quarter, the average realized price for oil was $39.22 per barrel (down from $53.93 in 3Q19). These prices exclude the impact of derivatives.
In 3Q20, the company acquired 305 communications sites for $101 million. The acquisitions were concentrated in France, where the company acquired 195 communication sites.
2. Earnings & Growth Analysis
American Tower has six reportable segments: U.S. property (56% of 3Q20 revenue), Asia property (15%), Africa property (11%), Europe property (2%), Latin America property (15%) and Services (1%).
For U.S. Property, revenue increased 2.4% to $1.12 billion, primarily due to increased leasing on its sites and contractual escalations, partially offset by the impact of its master lease agreement with AT&T.
For Asia Property, revenue fell 2.3% to $305 million, primarily attributable to churn in excess of contractual escalations.
For Africa Property, revenue increased 48.4% to $220 million, primarily due to strong tenant billings growth, an increase in pass-through revenue, and a modest increase in other tenant billings.
For Europe Property, revenue increased 16.2% to $39 million, primarily due to revenue generated from newly constructed sites, strength in the colocations line of business, and an increase in other revenue.
For Latin America Property, revenue decreased 9.1%. Business trends were favorable in this segment, but currency fluctuations negatively impacted revenue.
3. Financial Strength & Dividend
Moody’s long-term rating is Baa3/stable and S&P’s rating is BBB-/stable. As an acquisitive company with low cash flow volatility, AMT operates with significant debt and relatively low cash. Cash and equivalents totaled $1.63 billion at the end of 3Q20.
The company repurchased 264,000 shares in the fiscal year-to-date at a cost of $56 million. In 2019, it repurchased 100,000 shares for $20 million. In 2018, AMT repurchased 1.6 million shares for $233 million under its 2011 buyback program. In addition to buying back stock, the company is using capital for acquisitions.
4. Management & Risks
On March 16, 2020, AMT announced that CEO Jim Taiclet would leave the company to become CEO at Lockheed Martin. Tom Bartlett, who had served as CFO for 10 years, has succeeded Mr. Taiclet as CEO. Rod Smith is an EVP and is CFO.
Given its expansion plans, AMT operates with relatively low cash flow compared to debt. Offsetting that risk is the steadiness of cash flow and low volatility from core customers, who face contractual rate increases of more than 5% per year.
AMT also faces customer concentration risk from wireless network operators and the threat that the major carriers could merge, giving them greater pricing power. However, given that AMT is the largest tower company in the U.S., we do not expect these operators to defect to smaller and less globally dispersed competitors. In addition, the company faces risks from reduced capital spending on wireless networks and from technological disruption, especially from small-cell alternatives. However, we expect the explosion in global data traffic to support tower growth for several years.
Additional risks include government regulation, risks related to overseas expansion, and unfavorable currency effects.
5. Company Description
American Tower operates wireless and broadcast communications real estate, including wireless towers and distributed antenna systems. The company leases space to wireless service providers and radio and television broadcasters. AMT has over 180,000 towers and small cell systems networks.
We like the company’s growth prospects relative to peers, and believe that a higher price/FFO multiple is appropriate based on the company’s solid revenue and cash flow growth.