I'm not much of a fan of companies that use what I refer to as "Mickey Mouse economics," a personal term I use to describe a company that dances around the big "E" -- earnings -- and instead points out all of its other accomplishments in the hopes that no one will notice a potential earnings shortfall. There are plenty of violators out there, but today I want to hone in on wireless data tower owner SBA Communications (Nasdaq: SBAC).
SBA Communications isn't a stranger to short-sellers, who hold just shy of 8 million shares; and with good reason. SBA hasn't turned an annual profit in more than a decade and it has missed analysts EPS expectations an impressive and saddening nine consecutive quarters! In fact, looking back over the past 20 quarters, the company has only beaten or met expectations one time! So how does a stock like this rally more than 100% off its March 2009 lows? Cash flow!
What I do need to give SBA credit for is its ability to generate positive cash flow. In part, SBA is able to generate organic growth through leasing antenna space on its towers, but it's also able to grow by either building or acquiring other towers. With cell-phone data and text plans getting more competitive and smartphones more complex, the amount of bandwidth needed to transmit this data is only bound to increase. The increasing rivalry among AT&T (NYSE: T), Verizon (NYSE: VZ), and other carriers over network superiority (and the continuing network build-out it creates), along with the emergence of 4G, is music to wireless tower companies' ears.
But all that cash flow is meaningless if the company can't turn a profit -- and the price paid for acquisitions continues to overshadow free cash flow created. The relatively small company that competes against the larger American Tower (NYSE: AMT) and Crown Castle (NYSE: CCI) has no choice but to open its wallet and expand like the wind, otherwise its rivals will leave it in the dust. Unfortunately, this expansion comes with a hefty price: $3.2 billion worth of debt. This would be a staggering amount of debt for a profitable company, let alone SBA, which spends nearly as much on capital expenditures as it has cash in the bank.
SBA is priced at roughly 10 times this year's adjusted EBITDA, which is actually the same as Crown Castle and lower than American Tower at 13 times adjusted EBITDA. Yet the latter two are projecting a full-year profit, while analysts are forecasting losses from SBA clear into 2013.
SBA Communications has a large amount of debt to contend with and high-single digit organic growth simply isn't going to cut it. History has shown that this company can't turn a profit, which leaves me wondering: Will the 10th time be the charm for SBA Communications?
What's your take on where SBA Communications fits within the cell tower sector? Share your thoughts in the comments section below and consider tracking SBA Communications as well as your own personalized list of stocks with My Watchlist.
