Shares of American Tower (AMT) have been stalled since November. The stock traded at $51.79 on November 1, and closed at $51.54 on May 2. (The shares are up a little more than 2% as I post this today, May 3.)
Oh, there was the February rally to $56.73, which looked like it was going to bust the stock out of its rut—but the March 20 bid by AT&T (T) to acquire T-Mobile from Deutsche Telekom killed that.
We’ve been here before with wireless tower stocks. Any deal combining one big wireless-service provider with another knocks all the stocks in the sector for a loop. The fear is that consolidating two providers means one less customer for space on those cellular towers, and one less bidder keeping prices up.
If history is any guide, though, the worry is overstated, the sell-off is overdone, and now is the time to buy stocks in the group—especially American Tower. (American Tower has been a member of my Jubak’s Picks portfolio since May 2010.)
It’s not that American Tower wouldn’t lose revenue if the two service providers combined all their towers. About 20% of the company’s site-leasing revenue comes from AT&T, according to Morningstar, and 8% more comes from T-Mobile.
However, as Morningstar calculates, the last time the sector went through this kind of consolidation by providers—when AT&T merged with Cingular, about five years ago—it lost about 40% of the at-risk revenue.
This sounds like a lot, until if you realize it’s 40% of 20% and 8%. (Or 8% and 3.2%.)
And it sounds like even less when you take into account that much of this tower space is leased under contracts that will stretch out any damage over a couple of years. Maybe 2% of revenue is vulnerable to the effects of the deal at the average tower company, Morningstar concludes.
That figure is even lower for a company, such as American Tower, that has focused its recent growth ambitions on Latin America and India.
Cellular penetration is above 90% in the United States. So, in this mature market, American Tower has concentrated not on growing the number of sites, but increasing the number of carriers it services per tower.
That will drive the EBITDA (earnings before interest, taxes, depreciation, and amortization) margin to 67.3% in 2011, Standard & Poor’s forecasts, from 67.2% in 2010—and then to 67.7% in 2012.
But revenue and tower growth has come from outside the United States, where cellular penetration rates are much lower—and therefore have room to grow.
For example, in 2008 the cellular penetration rate in India was 35%. American Tower built its first towers in India that year, and since then has bought or built another 7,745 towers in the country.
That goes along with 2,633 wireless towers in Mexico, 1,700 in Brazil, 113 in Chile, 4,674 in Peru, and 1,008 in Columbia. Mexico and Brazil are scheduled to start deploying 3G networks this year, and the company recently bought another 1,800 towers in South Africa.
But even the good, old, mature US market looks like a source of growth in 2011 or 2012. US carriers have spent close to $20 billion tapping into the 700MHz spectrum, and have started to build out 4G networks that will require more tower space.
I think it’s worth patiently waiting out the AT&T/T-Mobile dead spot on these shares. My calculations work out to a target price of $64 a share by April 2012, a boost from my previous target of $57 a share.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of American Tower or AT&T as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
