Tower Companies Still Generating Investor Interest

JPMorgan initiated coverage of the three stocks in this space this morning

Industry leader American Tower gets a Neutral rating, Crown Castle gets a Neutral, but SBA Communications gets a Buy rating. The analyst sees more multiple expansion for SBA, from the current 7.4x to 11.0x PE. The other two should trade at 11.0x-12.0x but they are already at those levels, and hence the Neutral rating, according to the analyst.

He sees drivers such as WiMax deployment and 700 MHz market build-outs. The stocks are highly levered, which is a concern for me in this environment.

From Analyst Mike McCormack
We are assuming coverage of the Wireless Tower companies and adjusting our ratings. We are moving SBA Communications to Overweight from Neutral , Crown Castle International to Neutral from Overweight, and American Tower to Neutral from Overweight. In addition, we are establishing December 2009 price targets of $24 for SBA Communications, $23 for Crown Castle, and $30 for American Tower.

• Predictable, defensive businesses. The tower operators generate 85%-96% of revenue from their site leasing businesses, which rent space on their tower structures. The vast majority of revenue is recurring, driven by long-term contracts and pricing remains stable due to strong demand and annual escalators. In addition, 60%-70% of revenue comes from the Big 4 national carriers, which generally have the most stable budgets and are first to rollout network enhancements.

• Carrier activity continues to drive organic growth. We expect continued 3G rollouts from T-Mobile, AWS market builds from Leap Wireless and MetroPCS, and, potentially, a 4G WiMax build from Clearwire to provide new sources of leasing growth over the next couple of years. Beyond 2010, we expect 700 MHz market build-outs, especially 4G LTE launches from AT&T and Verizon, to become more significant growth drivers. In addition, data usage continues to grow at a significant pace, and we expect carriers to continue adding capacity.

• Financial outlook. American Tower is the strongest operator financially, generating the most leasing revenue per tenant and highest margins. Crown Castle, despite being the largest operator, has margins substantially lower and more in-line with the much smaller SBA Communications. We believe both Crown and SBA should, however, have opportunities to expand margins over the coming years. In addition, we expect SBA will remain the strongest grower over the near to medium term.

• Leverage poses challenges. Leverage ranges from roughly 4.0x for American Tower to 7.0-9.0x for Crown Castle and SBA Communications. Given credit market weakness, high leverage levels could limit investment opportunities, although we do not see any risk of insolvency. In addition, both Crown and SBA face substantial refinancings in 2010-11, which could significantly impact free cash flow.

• Favor SBA on higher growth. We value the tower operators on price/2010E recurring cash flow to equity multiples and assume worst case refinancing scenarios for Crown and SBA. On this basis, American Tower is trading at 11.8x, Crown at 8.5x, and SBA at 7.4x. We believe American Tower should trade at 12.0x, while Crown and SBA should trade at 11.0x, implying greater upside for SBA.