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American Tower (NYSE: AMT ) and its two publicly traded competitors, Crown Castle (NYSE: CCI ) and SBA Communications (NASDAQ: SBAC ) , use the same business model: They own wireless towers and lease them to telecommunication carriers like Verizon on long-term contracts. The tower industry is an oligopoly in the U.S., with these big three accounting for 82% of the market, although the global market is much more fragmented.
American Tower is a stable, lower-risk investment because of its long-term, guaranteed contracts. Most of its customers' tower leases expire in 2019 and beyond, and the structure 3% to 5% annual price increases and careful lease roll-off management leads to steady, consistent growth of revenue and cash flow.
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A full transcript follow
Hey, again, Supernova Fools. This video is going to describe how and why American Tower qualifies as a great "safety in a storm" type of stock. I think this video makes the most compelling case for business stability, so if there's one video out of the three that you pay attention to, this one is it.
This slide shows American Tower's global tenant lease renewal schedule. The numbers represent percent of leases up for renewal in a given year. For example, in 2014, only 6% of leases are up for renewal. In 2015, only 4%. So on and so forth.
First off, what we know is that American Tower's leases are noncancelable and anything that's on the books is locked in until it's time for renewal. So, this slide is pretty important. And since their tenants are investment-grade — multibillion dollar companies — there's very little risk of default or failure to pay. Their customers are going to pay and American Tower is going to collect their rent, so to say.
Secondly, American Tower's management does a great job managing the roll offs of the contracts. As you can see, over 70% of American Tower's leases are set to renew in 2019 or beyond, meaning that very little revenue is at risk of falling off the table anytime soon. Even if none of their customers renew in 2014-none of the leases that are up for renewal are due — American Tower will only lose 6% of their revenue, which is not that alarming.
Now, that doesn't mean that 6% of revenue is going to fall off the table. Historically, American Tower's renewal rates are around 98-99% ... pretty impressive ... meaning that only about 1-2% of revenue is lost on an annual basis due to churn. That's evidence, right there, of strong switching costs preventing carriers from not renewing.
Customers typically renew and they might renew even early for a number of reasons, so management does a great job of pushing off expirations into further years. Some of that 6% might even get pushed into 2016. Some of the 5% in 2016 might get pushed into 2019 and beyond. American Tower's constantly looking to get its customers to renew and the roll offs of the contracts into a more favorable position for the company.
These long-term, contracted leases with high renewal rates and low churn lead to very stable financial performance. As you can see on this slide, anytime you're looking at a financial company or at a stock or an investment or a business ... whenever you see trends that go up and to the right, generally that's a pretty good thing ... and as you can see in this slide, American Tower has been very stable and very consistent. I think that's a testament to its leases and its contractual obligations and to the annual escalations that they have into their contracts.
I didn't really touch on that, but their lease agreements include annual price escalations that range from about 3-5% every single year. That's basically guaranteed growth of 3-5% every year, and any additional activity adds onto that growth rate. As you can see, both revenue and EBITDA (earnings before interest, taxes, depreciation and amortization — basically a proxy for cash flow for this business) have both increased at very healthy rates over the last seven years, well over 100%, up around 150%, on an absolute basis. So, American Tower has very stable, very steady performance.
Also of note. I'm sure you guys remember in 2008-2009, the stock market had a pretty terrible year and a lot of stocks collapsed. Cyclical companies may have seen huge drop-offs in revenue and in cash flow, but due to the contractual nature of the relationships between American Tower and its customers, American Tower didn't really see any hit to its business in 2008 and 2009, and things continued to progress very nicely in a linear ... well, almost even exponential ... up and to the right pattern.
So, this right here is why I think American Tower is a very stable, steady, "safety in a storm" type of company.