Call on American Tower for Growth and Income

05/02/2019 5:00 am EST

Focus: REITS

Eddy Elfenbein

Editor, Growth Stock Advisor

American Tower (AMT) is in the cell phone tower business; these companies lease the space on their structures to several tenants like wireless carriers and government agencies, explains Eddy Elfenbein, editor of Investors Alley's Growth Stock Advisor.

This business has a strong growth component, thanks largely to the coming of 5G wireless networks. These faster, more powerful networks are an absolute necessity for our interconnected world.

The explosive growth in data traffic is driven by two key trends. The first is an expected 50% increase in connected wireless devices by 2021. The second is a major rise in the amount of data consumed per device as users upgrade to new smartphones.

This new tech also includes things like ultra-HD video, augmented reality and connected self-driving cars. And they all consume huge amounts of data, and that means towers.

If you think of the wireless network as a toll road, 5G would have significantly larger lanes for wireless traffic and dramatically higher speed limits than 4G—in both cases 100 times greater.

Each new generation of wireless technology has required a greater level of investment from wireless carriers which closely correlates with tower leasing activity. It is highly likely the adoption of 5G will follow this historical trend.

Now let’s get back to American Tower. The company has over 170,000 tower sites. What I like is the economics of this business. As the company explained to Bloomberg, “Single-tenant towers have gross margins of 40% from rentals…two tenants have 74% margins…three tenants have 83% margins.” You can see the benefits of steady growth.

American Tower generates more than half its total revenue here in the U.S., with its customers being all the major wireless carriers. Another big plus I see for American Tower is its vast overseas footprint. This is important because the U.S. does not lead in 5G technologies.

American Tower is also in key emerging markets. For example, AMT has its largest international exposure in India where data usage has been growing 100% per year. Within a few years, I think most of AMT’s revenue will come from outside the U.S.

Latin America has a lot of potential too. There are over 200 million people in the middle class in Latin America. A significant proportion of these consumers are under 40 years old (the heaviest data users).

American Tower is a REIT very well positioned to ride the trend of a more interconnected world! The REIT currently yields about 2.6%.

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