Shares of most companies fall during a recession because of reduced earnings or wavering consumer sentiment. But not all stocks are set to tumble. In fact, some companies can actually soar in a recession.
American Tower (AMT 0.80%) is a data and infrastructure real estate investment trust (REIT) that is not only well positioned to ride out turbulent times but could actually see its stock rise. While there are no guarantees, here's a closer look at why this company could be a good buy as we inch closer to a recessionary period.
Data and communication needs don't falter during a recession
Recessions usually result in economic tightening, with rising unemployment and slowing spending. This affects nearly all aspects of the economy, but some industries will fare better than others. For example, discretionary retail spending, like buying clothing or beauty products, is among the first to feel the impact as people cut spending.
On the other hand, industries like healthcare, data infrastructure, or grocery stores may not feel the same pinch because of the essential role they play in society. People will always need to eat, receive medical care, and communicate with others, which is what makes American Tower a likely contender to soar: It's in an indispensable industry. People don't talk, text, or scroll less just because of a recession, which means its operations should remain steady even during a downturn.
The REIT currently owns and leases 221,000 different communications sites that help keep our world connected through its vast system of cell towers around the globe. And thanks to the REIT's acquisition of CoreSite in 2021, it now has its hands in the data center industry too.
A lot of things are in its favor
Right now there are a lot of trends in American Tower's favor, even if an economic downturn is to come. Mobile data usage is at record levels and isn't expected to retreat anytime soon. Network spending and capital improvements for leasing its towers have decreased. And the rollout of 5G technology is helping boost revenue and earnings. As of Q1 2022, the company saw 12.8% growth in earnings before taxes, income, depreciation, and amortization (EBITDA), and 7% growth in funds from operations (FFO), an important metric that shows REIT profitability.
The introduction of 5G technology won't be completed at its communication sites until 2025, so there are still several years of growth ahead. Plus, now that the REIT has exposure to data centers, it can capitalize on all aspects of the data and communications industry.
Its acquisition of CoreSite did push its debt ratios above desirable levels, around 5.8 times its EBITDA. But it is taking measures to address this, most recently by entering into a joint venture partnership with Stonepeak, a private equity firm. This partnership should help give American Tower more liquidity and lower its debt balances in exchange for a 29% stake in its 27 data centers.
All in all, American Tower has a tremendous track record of growth over the years and has provided a 15% annualized return during the past decade. Given the rapid changes and robust demand in the data infrastructure marketplace, it is clear why this company could soar in the coming years.