A Tower of Power
02/07/2008 12:00 am EST
Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says a leading provider of wireless towers has good growth prospects and an attractive valuation.
American Tower (NYSE: AMT) is the leader in the wireless-tower business. The company has some 20,000 wireless towers in the US, as well as nearly 3,000 towers in Mexico and Brazil. The service providers need the towers to provide wireless coverage.
The good news is that this is a growing business. AMT's chief executive officer, Jim Taiclet, [recently] said that he expects 2008 to be one of the best years ever for American Tower. And he has also said that his company plans to build or acquire about 300 new sites this year. That, of course, means that it is very likely that the company's subscriber base will also continue to grow at a steady pace. Among its subscribers are wireless service providers—companies such as Verizon, Sprint Nextel, and AT&T.
The wireless service providers are all currently upgrading their networks and demand for their services is rising, driven by voice, data, and new technologies such as WiMax, as well as the deployment of third-generation (3G) networks.
Nationwide, the number [of towers] will grow as more wireless networks build out third- generation and even fourth-generation wireless networks. According to the Cellular Telecommunications Industry Association (CTIA), as of June 2007 there were some 210,360 cell sites in the US Based on that it is estimated that there will be more than 256,000 sites by 2012. About 18,000 of those sites will be on towers.
AMT [also] is focused on expanding its business in emerging markets. While AMT is considering more investments in Mexico and Brazil, it's also looking into other countries in Latin America that are in an earlier stage of wireless development than the US, so the upside potential could be greater. Another potential growth market: India.
During [the third] quarter, AMT's profit surged on double-digit revenue growth as well as a tax benefit. Net income rose to $59.6 million, or 14 cents per share, [while] revenue was up by 10% to $367.6 million. AMT's fundamentals are more attractive than its biggest public competitors [and it] has a much lower relative leverage ratio. So, it could take on more debt to make large tower purchases or even to buy back stock—something American Tower has been hinting that it might do.
When AMT reports its year-end numbers, the company is expected to have generated free cash flow per share of $1.64 in 2007 [and it] should generate free cash flow of $1.87 this year and should be able to increase cash flow by about 18% to 20% a year for the next few years. At that rate, AMT's cash flow will be $2.26 per share in 2009. Given the current cash flow yield [cash flow per share/stock price] of 4.3%, I expect AMT shares to reach $53 in one year—a gain of 40% from current [prices below $38].