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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 (NYSE: VZ ) 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.
Within this booming industry, American Tower stands out. It has the largest international exposure, the most favorable debt profile, and the highest margins of the big three tower companies.
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A full transcript follows
Okay, Fools. So, in this last video, I'm going to talk about why we prefer American Tower over its two biggest competitors — Crown Castle and SBA Communications.
The trends and the business model advantages that I talked about in the previous two videos benefit all tower operators. With that said, why would you want to pick American Tower over its other two U.S. listed adversaries?
This slide, right here, which shows the tower portfolios for the three tower operators does a good job of explaining one facet of why I prefer American Tower to its two biggest competitors. Obviously the biggest differentiator in this slide is American Tower's international exposure. You can see compared to Crown Castle and SBA Communications — their international exposure represents a far bigger portion of their tower portfolio and that's a big deal for a few reasons.
For one, American Tower was the first mover in the international consolidation of the tower industry. Obviously, the international market is much bigger than the U.S. market. The U.S. market is also more mature. And so being the first mover gives them a big advantage operationally from getting in on the ground early in some of those frontier markets.
Their top three international markets are Brazil, Mexico and India. I'm not sure if they're exactly in that order, but those are the top three and they also have operations in Europe and in Africa, as well. So, the international tower market is growing even faster than the U.S. tower market and the growth cycle in those markets is anywhere from three to fifteen years behind, depending on geography. What that leads to is stronger growth in those international markets.
For example, in American Tower's last quarter, international organic growth was about 16% compared to U.S. organic growth of just about 9% or a little more than 9%. So, even though U.S. growth isn't exactly lagging at 9%, international growth is even faster.
Another reason why I like American Tower's international exposure is because margins are higher internationally than they are in the United States. American Tower is able to pass on some of its expenses, such as land costs, to its tenants overseas, boosting margins. This is going to come up later, so remember that point.
This slide here is a debt overview of the three competitors and it shows why I think American Tower is in the best position with respect to its debt. In the tower industry with very steady, stable cash flow, these companies can support a good deal of debt due to their cash flow, so they're never really at risk of defaulting on their debt because they can plan for and predict what their cash flow is going to look like and how much they need to pay off their debt whenever they need to.
This is a very common ratio here used in the industry, which is the leverage ratio and the calculation for that is debt-to-EBITDA. Remember that EBITDA is basically like cash flow — so it's just basically a cash flow coverage ratio — so how much debt do you have and how much cash flow would you need. Basically how many years of cash flow would it take you to pay off all of your debt if you wanted to do that.
You can see American Tower's debt-to-EBITDA ratio is 5.5x meaning that it would take 5.5 years of cash flow to pay off all of their debt. Crown Castle at 4.6x. SBA at 7.2x. This is a little bit misleading, because historically, American Tower has stayed in the 3-5x range, usually around 4x, which is lower than Crown Castle and SBA. Also, Crown Castle is a little bit lower than their historical average which is about 4-6x. SBA typically stays within 7-9x.
So, American Tower is historically a little bit more conservative with their debt. Right now it's a little bit misleading because they've made some recent acquisitions which pushed up their leverage ratio, but they're historically more conservative. What that leads to is a higher credit rating. If you're levering up to seven to nine times your annual cash flow, creditors are going to reduce your credit ratings. You can see for SBAC — they've got a B+ rating. Crown Castle's got a BB- rating and American Tower's got a BBB rating.
You can look up these credit ratings. These are S&P (Standard & Poor's) credit ratings. The more letters you have, the better your rating, so BBB is better than BB and BB is better than B. Obviously A is better than BBB, as well. And then the minuses and the pluses mean the trends.
So, American Tower's trend is negative and so is Crown Castle's and SBA's is positive. That's not really too worrying. The reason why it's negative is because, like I said, American Tower has made recent acquisitions, as has Crown Castle, which increased their leverage ratio ... whereas SBA Communications has been paying down their debt and they're at the lower end of their historical debt-to-EBITDA range at about 7x.
In this industry — with companies that carry a good deal of debt — having a lower cost of debt is very important, so American Tower has the lowest weighted average cost of debt at 4% compared to 4.2% and 4.1% for SBA Communications. Interest expense is one of the biggest expenses for this company and companies in this industry, so having a lower cost of debt is an advantage and it can help give you better margins than your competitors if you're paying less on your interest.
Speaking of better margins, here is a margin comparison for American Tower, Crown Castle and SBA Communications. And as you can see, across the board American Tower has higher margins ... gross margins, operating margins and EBITDA margins.
Now the reason for that is severalfold. Like I said earlier — I told you to remember the point from the first slide of this video — they have higher international exposure and that international margins are higher than domestic margins. So, obviously, if you have a higher mix of international towers compared to United States towers, your margins will be a little bit higher. Also, this is just a testament to skillful management and operational efficiency ... driving down costs and having higher margins than their competitors.
So, American Tower, for a variety of reasons. Higher international exposure, better debt management (lower cost of debt) and higher margins. I think they are the best operator in the industry. I think they have the best prospects moving forward to capitalize on these nice, secular trends in growth and data use and carrier network investment spending and they should be one of the biggest beneficiaries of all of these trends.