Let's get this said right up front: Cell-phone towers are downright ugly. Their appeal is that they are critical infrastructure for what's still a fairly new technology. Plus, new cell-phone features, like cameras and email, should hopefully increase the level of use and penetration relative to other developed countries, which would bode favorably for tower operators' businesses.
But the industry is saddled with a host of economic and regulatory issues. First, these operators are faced with the relatively difficult prospect of finding bandwidth (cell phones are serviced by a limited capacity, regulated and sold by government), and are in turn finding it difficult to finance future customers economically. Also, the industry is quickly becoming mature, resulting in significantly reduced pricing power.
In days of yore (or the 1990s), tower companies took on massive amounts of debt to build out the tower infrastructure -- and they overbuilt. SpectraSite
Since emerging, SpecraSite has made the right moves from a balance-sheet perspective. It has reduced the weighted-average interest cost on its still sizable total debt of $750 million (that's about two years' revenues) to a respectable 5.74%. Analysts expect the company to earn $1.02 per share this year and $1.51 next year. But the stock is trading at 38 times 2006 earnings -- a healthy market premium for a company in a still-competitive industry.
American Tower lumbers under a massive $3.1 billion debt. It is aggressively buying its high-yield debt to reduce its interest income and is using its free cash flow, which came in at a robust $181 million for 2004, to reduce its leverage.
What institutions see in both these stocks is what was promised in the go-go mid-1990s. At some point, the massive capital investment ends and these are to become cash machines -- and, eventually, dividend machines. This might well be happening, but the operative question is to what degree that massive capital investment overextended the industry -- something that would inevitably squeeze margins as competition toughens.
At today's market capitalizations, I'd say a lot of good news is priced into these stocks.