How High Can American Tower Fly?

Shares of American Tower (NYSE: AMT  ) just hit a 52-week high today. Let's take a look at how it got there and whether clear skies are in the forecast.

How it got here
The story behind American Tower's move higher is a sectorwide trend of growth for the antenna tower providers. The thesis behind owning antenna tower stocks is that as data demand grows -- which is all the time, thanks to the demand for high-speed mobile access -- the need for antenna space on these towers will grow as well. The antenna towers, run by American Tower, Crown Castle International (NYSE: CCI  ) , and SBA Communications (Nasdaq: SBAC  ) , are set up in such a way that adding additional antennas is quick and cost-efficient, leaving these companies with gross margins typically around 70% or greater.

The one concern with the antenna sector is, of course, the capital-intensive costs associated with building and acquiring those towers. Much of the sector is mired under mountains of debt, and these companies rely on strong cash flow to drive growth and to pay down existing debt. Thankfully for American Tower shareholders, the company adopted a plan to become a REIT as of Jan. 1, and it intends to distribute 100% of its taxable income in the form of a dividend. I'm sure that partially explains why the stock is trading at a new 52-week high as well.

How it stacks up
Let's take a look at how American Tower stacks up next to its peers.

AMT Chart

AMT data by YCharts.

From top to bottom, this sector tends to trade in tandem.

Company

Price/Book

Price/Cash Flow

Forward P/E

Cash/Debt

American Tower 7.8 22.4 33 $352 million / $7.2 billion
Crown Castle International 8.0 25.2 49.1 $80 million / $6.9 billion
SBA Communications NM 24 NM $53 million / $3.4 billion

Source: Morningstar. NM = not meaningful.

This definitely is not a sector that caters to value investors. SBA Communications has been losing money consistently for years, thanks to depreciation on its towers and lower margins than its two peers. Crown Castle presents a considerably better option than SBA, but let's still be clear that with nearly $7 billion in debt, no dividend, and a forward P/E that's markedly higher than American Tower, it also is easy to pass up. Even at 22.4 times cash flow, American Tower and its roughly 45,000 worldwide towers is the obvious best pick in this sector.

Another key factor to consider is the overall operating cash flow of these companies over the past 12 months. Despite having the most debt overall, American Tower has $1.12 billion in operating cash flow, which is equal to 15.4% of its outstanding debt, while SBA, with only $3.4 billion in debt, produced operating cash flow that would only cover 7.4% of its outstanding debt. In short, American Tower is the best-positioned antenna company by the numbers and is also the most capable of paying down its debt.

What's next
Now for the real question: What's next for American Tower? That answer really depends on whether or not the company can keep its debt levels under control and whether the demand for wireless services continues to accelerate. Based on Apple's (Nasdaq: AAPL  ) blockbuster results that highlighted the sale of 35.06 million iPhones during a three-month period (with most of those sales coming from international markets), it's probably safe to say that wireless data demand isn't ebbing even the slightest bit.

Our very own CAPS community gives the company a four-star rating (out of five), with 90.7% of members expecting it to outperform. Although I have yet to make a CAPScall on American Tower prior to today, I'm finally ready to endorse it to the upside.

One of the primary factors that held me back was the lack of a dividend. Now that there's a shareholder incentive to owning this REIT, I feel it's a smart way for income-seeking investors to add growth to their portfolio without the wild swings associated with high-volatility technology stocks. Also, strong spending forecasts from AT&T (NYSE: T  ) and Verizon signal that we're nowhere near the ninth inning of infrastructure build-out -- even in the United States. American Tower is well diversified and its strong cash flow is worthy of a spot in my CAPS portfolio.

If you'd like the inside scoop on three more companies set to take advantage of the next technological revolution, click here and you'll get free access to our latest special report.

Craving more input on American Tower? Start by adding it to your free and personalized Watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of American Tower and Apple, as well as creating a bull call spread position on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2012, at 11:37 AM, BuffetsCaddie wrote:

    What is bothersome to me about AMT (which others seem to applaud) is this statement: "Thankfully, for American Tower shareholders, the company adopted a plan to become a REIT as of Jan. 1, and it intends to distribute 100% of its taxable income in the form of a dividend." I like AMT as a high growth play, but how does a company grow when it is distributing its income to share holders.... debt? If debt is the answer then how does it pay down debt when the earnings are going to shareholders? I've struggled with these questions. It seems that being too shareholder friendly may be more of a burdon to both the shareholders and the company. Someone please argue with me... So far I have not heard any counter points to these concerns.

  • Report this Comment On May 01, 2012, at 6:47 AM, beernose wrote:

    You got it right, BuffetsCaddie. If everything was paid off and there was no more investment to be made, sure, the REIT makes sense. But American Tower is going to be locked into a pattern that hasn't worked out well for the federal government....borrow borrow borrow and let the generations of the future worry about it. I work in the wireless sector, have spent the money on tower builds, have negotiated the wireless carrier contracts on cell sites, and know the costs involved. There's a lot of capital that must be thrown around, and when there's no stash of cash to negotiate with, decisions get slower, take longer, and the opportunities dry up.

    PS: Pretty hard to acquire a failing competitor's assets when you have no cash reserves.....

    PSS: Much of the Fool's musings on the wireless phone industry have me rolling my eyes. They remind me of the days when the shareholders were lauding Nextel like it was the garden of Eden while those of us inside the industry knew you were buying the toll rights to a dead end street. It isn't Sprint that sunk that ship, it was already sinking while you were all jumping aboard Nextel. Don't invest in an industry you know nothing about. Period.

  • Report this Comment On May 01, 2012, at 6:51 AM, beernose wrote:

    Let me adjust my last sentence: KNOW the industry you invest in before you make that investment. Every industry needs its investors, but you need to know that industry reasonably well before you start throwing your nest egg into it.

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