Analyst Urging Investors to “Short Crown” Comes Up Short

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Inside Towers’ Tower Stock Analyst: Bill Grove

screen-shot-2016-12-11-at-5-24-02-pmA recent market analysis reprinted in Seeking Alpha urged investors in Crown Castle, Int’l (CCI) to “Short the Stock or Get Out”.  Inside Towers’ own tower stock guru, Bill Grove, couldn’t resist a spirited reply to the article issued by Celeritas Investments. “It’s bad analysis,” said IT’s Bill Grove.

The author, remaining anonymous, is “a former financial analyst, who worked at Northern Small Cap Value Fund for three years” and is now managing the family portfolio. The Facebook link listed on the article leads to a young woman by the name of Lauren Gyure.

The Celeritas viewpoint, presumably Ms. Gyure’s, is that CCI’s business model “is not as healthy as it shows” and investors should not be deceived by temporary strong dividend yields.  “The eight years of ultra-low interest rates environment made investors thirsty for yield, no matter where it’s sourced from,” Celeritas’ author claimed. “Pushing the stock price of companies offering attractive dividend yields. But as one of history’s greatest investors [Warren Buffett]  said, ‘You only find who is swimming naked when the tide goes out’.”   

Inside Towers’ tower stock analyst Bill Grove was not impressed.  “I love it when these SA contributors wrap their horrendously poor analysis in a Warren Buffett saying as if it somehow justifies their idiotic conclusions,” Grove said.  

Celeritas’ author compared CCI’s business model of building and leasing property to major carriers as being “no different from the car renting business model, where companies buy cars with upfront cash and lease them back to customers.”

“Comparing the tower business to the car rental business makes no sense,” Grove countered. “There is intense competition in the car rental business, and I would argue some secular headwinds to boot.  In the car rental business, because the assets (automobiles) are such ‘short-lived’ assets, there is an almost perfect matching of Depreciation Expense and Capital Spending to sustain current business profitability.  In the tower business, the assets (towers, land or land leases), are such ‘long-lived’ assets – they require almost no K/S to maintain their current profitability,” Grove said.  “In fact, in most cases, these assets actually appreciate in value over time because of escalator clauses and greater occupancy.  On the other hand, while acknowledging some minor risks to the business model (technological change and carrier consolidation), I would argue that there are at least three major secular tailwinds to the tower business; the rapid growth in data usage, 5G and FirstNet,” he said.

“We all understand how difficult it would be to go into a major metropolitan area and start whipping up new towers to compete with the existing ones.  Not going to happen,” Grove said. “It strikes me as a reasonably defensible business model.”

The Celeritas author disagreed. “To show the extent of CCI’s poor business model, assume the following: If the company generated $380 million this year, and didn’t burn cash in any year for the next 50 years, it needs a 7.5 percent CAGR to deserve its current valuation, which is near to impossible given the high negative fluctuation of its cash flows (using discounted cash flow analysis with 4.2 percent WACC).”

Ball in your court, Mr. Grove: “As far as I can tell by the analysis, the author is assuming that ALL capital spending (K/S) and acquisition spending is required to sustain current cash flows,” Grove said. “NOTHING could be further from the truth.  In 3Q 2016 CCI had Depreciation, Amortization and Accretion expense of $280mm.  Only $19mm of K/S was required to sustain current operations. Total K/S was $221mm and Acqs were another $51mm for a total of $272mm.  Of this $272mm, $253mm (272 – 19) is revenue generating!!! “ (editor’s note: multiple punctuation provided by Mr. Grove)

“I’m not saying the company will go bankrupt…,” the Celeritas author wrote.

“So 93 percent of the capital that this author concluded just goes ‘poof’ is actually growing future cash flows,” Grove said. “Bad analysis,” Grove concluded.

December 12, 2016

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