Why American Tower Is the Best-Positioned Tower Operator

American Tower is the best-positioned tower operator, with better margins, debt management, and international exposure than its competitors.

Jun 30, 2014 at 8:51AM

Free Premium Content -- Below you'll find a brief sample of the content from our Motley Fool Supernova wealth-building service, captained by Motley Fool co-founder and legendary investor David Gardner. Generally, only paying Supernova members are given access to this high-level info. But we wanted to share just a small taste of what it's like to be a part of this exclusive money-making journey, in case you're interested the next time we open the hatches of Supernova to the public. 

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.

Free 30-day trial: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

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.

Billy Kipersztok owns shares of American Tower. The Motley Fool recommends American Tower and Vodafone. The Motley Fool owns shares of American Tower. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information