Analyst: SBA’s ‘Ferrari Hits Speed Bump, Shares Priced Like A Ford’

If a tower company’s growth rate was compared to a car engine accelerating “zero to 60 mph in six seconds,” then SBA Communications might be a reversal of sorts, like 60-to- zero growth in four quarters. That’s the way Macquarie Securities analyst Kevin Smithen put it in his Friday afternoon research report headlined “Tower ‘Ferrari hits a speed bump but now priced like a ‘Ford.’” He said he and his research team spent the past week and a half researching the company to determine “what happened to SBAC’s premium growth rate.” Finally, he had “a long call with CEO Jeff Stoops yesterday (Thursday, November 19), we are now convinced that SBAC is seeing a pause in 2016 US growth almost entirely due to its lack of an MLA (master lease agreement) with AT&T. This fact also hurts its site augmentation revenue due to a more a compressed D&A schedule on this segment than peers (SBAC at 2.5 years vs. peers at 10 years).”

Smithen recalled how “’a la carte’ pricing helped SBAC achieve industry leading U.S. leasing growth rates in 2012 – 2014, the slowdown at AT&T beginning last fall has begun to catch up with the company.” He believes that Crown Castle and American Tower “were able to protect 2015 revenue from AT&T, and Crown Castle will have protection in 2016. While he adds that “AMT’s deal expires over the next few months, we believe,” Inside Towers reported November 2 how, during its Oct. 30 conference call with analysts AMT CFO Tom Bartlett responded to an analyst’s question about reports the company’s Master Lease Agreement with AT&T’s is expiring in 2016.
“Let me be really clear: the Master Lease Agreement is not expiring. Okay?” Bartlett said emphatically. “There are certain elements that (CEO) Jim (Taiclet) talked about that change over that period of time but the MLA is not expiring. I know there have been some write-ups and I want to be very clear on that.”
Smithen surmised, “If AT&T would normally be three percent of the nine plus percent new organic leasing revenue, we estimate that it’s closer to 1.5% at current levels.” He is assuming that AT&T will see an uptick in its second quarter applications but concludes his report with “we don’t expect to see a pick up in AT&T applications before Q2, we don’t see any non-traditional catalysts for SBAC shares.” But he believes shares of SBAC are trading low. “The stock is trading at just 14.6 times our $7.19 adjusted funds from operations/share forecast for 2017, which we think is far too low for a mid-teens AFFO/share compounder from 2017-2020. In a year, we believe SBAC will trade at 17-20 times 2017E AFFO equating to $122-$144, depending on US growth rates, interest rates, and growth and sentiment in Brazil. Our Outperform rating and $125 target price are maintained.”