What happened
Stock in American Tower (AMT -3.32%) fell 14% in January, according to data provided by S&P Global Market Intelligence. One of the largest of all real estate investment trusts (REITs), with a market cap of roughly $112 billion, can now be had for about $245 a share.
American Tower's pullback last month was significantly larger than the S&P 500's drop of about 5%. The stock had gained 19% in 2021, so some profit-taking was in store. Other reasons this telecommunications tower giant sold off include a JPMorgan Chase analyst's downgrade from "neutral" to "underweight" early in the month.
Image source: Getty Images.
So what
That report cited concerns about a high valuation -- at the time, American Tower was trading around 28 times adjusted funds from operations (AFFO), a critical measure of a REIT's profitability.
There also have been concerns raised about cell tower operators' growth options in a maturing U.S. market. That's understandable, and American Tower has addressed that through international acquisition and expansion. First was its January purchase of Telxius Towers from Telefonica, giving it 31,000 sites in Germany, Spain, Brazil, Chile, Peru, and Argentina. AMT said then it was planning to spend about $500 million on 3,300 new sites in Germany and Brazil through 2025.
Then in December, AMT bought fellow REIT CoreSite, operator of 25 data centers in the U.S., giving the new owner new levels of digital integration as the global 5G rollout accelerates. Some analysts questioned that purchase, including the $10 billion price tag and whether some customers might prefer the freedom of choosing between data management providers and the telecommunications rails that connect them.
Those concerns seem more short-term to me. How AMT integrates CoreSite's business remains to be seen, but in the long run, that added income should help this REIT produce the taxable income that it's required to pay to investors.
And over the long run, an investment in American Tower has been rewarding, indeed. For instance, $10,000 invested here 10 years ago would now be worth about $46,700. That's pretty handsome growth for what's not typically considered a growth stock.
American Tower also has raised its dividend each of the past 12 years, including by about 65% in the past three years, and is now yielding about 2.3%, which makes it nice competition for a lot of fixed-rate investments, too.
Analysts haven't turned their backs on this stock en masse, either. A MarketBeat assay of 16 ratings had an average target price of $294.93 as of Feb. 7, which would be an upside of about 20% from where American Tower stock currently sits.
Now what
American Tower still looks like a good buy at this price level and given its position in a market that can only be expected to grow as 5G rollout accelerates around the globe. American Tower has a portfolio of about 219,000 communications sites in more than two dozen countries, with 43,000 of those properties in the United States and Canada.
And keep in mind, these are indeed properties, critical commercial real estate with a client list that includes the three largest carriers in the country as well as a vast array of broadcasters, wireless data providers, governments, and other customers around the world.
These users tend to sign long-term leases with rent escalations built in, helping the income keep up with inflation and other price pressures that may emerge in all those different markets. Plus, this is a business with high barriers to entry, given the specialization and regulatory compliance required -- that's why there are so few major operators. This downturn in American Tower's stock price is no reason to bail out if you're already an investor, and it marks a good time to invest if you're not.
