By Colby Synesael, Managing Director, Technology, Media and Telecom – Communications Infrastructure; Telecom Services, Cowen Equity Research
During the recent Wireless Infrastructure Association’s annual conference in Charlotte, NC, we met with management of the three public tower operators, as well as others, and sat in on several panels. We came away [with] the view that U.S. macro tower growth should be in-line/slightly above each company’s respective 2018 guidance despite some concerns that T-Mobile/Sprint could alter their network investments/priorities in light of their recently proposed deal. At the same time, we continue to believe growth should further accelerate in 2019 driven largely by AT&T, although we increasingly doubt growth can continue to accelerate into 2020. Considering that the direction of growth rates have historically been a good indicator of the direction of tower multiples, while we believe there is upside to each stock over the next 12 months, we believe that stock appreciation could be relegated to at best that of AFFO growth over the next several years. Our favorite tower idea is American (AMT, Outperform), followed by Crown (CCI, Outperform), and then SBA (SBAC, Outperform).
Direction of Growth in 2020+ Unclear as We Attempt to Look Beyond the Current Horizon
Tower operators that we spoke to – including public and private companies – in general remain positive on 2018/2019 demand although some noted caution related to the recently proposed T-Mobile/Sprint merger and more specifically the likelihood Sprint moves forward with the stepped up investments it messaged in the fallout of the then merger back in November 2017. Key is the view that T-Mobile intends to largely shutdown the current Sprint network rather than integrate the two networks, which begs the question will Sprint pull back on its investment considering it may ultimately be all for naught or will Sprint continue with its plan realizing deal approval is far from certain (and that if it delays investment for ~1-2 years it could ultimately prove a death sentence)? While multiple private providers we spoke to said Sprint has begun to put projects on hold/re-prioritize, each of the public tower operators said they have not seen any change. SBA added it would seem logical to spend a few billion between now and deal close to preserve Sprint’s value while Crown said even if Sprint changed its plans it would have a limited impact on 2018 results. Others suggested Sprint may propose an early out clause on new sites if the deal goes through – something some private tower operators and SBA said they would consider under the right terms.
All of the tower operators we spoke to suggested that AT&T has gotten off to a slower than expected start with their One Touch initiative, however were also universally confident demand was coming and that AT&T alone would likely drive an acceleration in growth rates in 2018 vs. 2017 and 2019 vs. 2018. As a reminder, AT&T has said it intends to upgrade about one-third of its cell sites in 2018 and that while it has five years to upgrade its network per its agreement with FirstNet, it would like to finish the upgrade earlier. Importantly, the step-up in growth rates is being driven both by volume and price as some that we spoke to suggested the price of AT&T amendments was >$1,000/mo and is driving the average price of amendments up meaningfully vs. last year. Regarding T-Mobile/Verizon, it appears they got off to a slower than expected start in 1Q18 although positively this does not appear to be long lasting, with tower operators in general expecting demand to pick up through the remainder of the year. Verizon however seems to be targeting specific geographies opposed to doing network wide upgrades and thus activity per tower operator (especially smaller ones) can ebb/flow dramatically. Similar to Sprint though, some operators did caution it is keeping a close eye on T-Mobile and whether they change their tone/messaging.
While the likelihood that growth continues to accelerate through 2019 appears intact, there is real debate amongst operators we spoke to regarding what happens in 2020, considering 1) the timing/duration of AT&T’s investment upgrade, 2) the impact of a potential Sprint/T-Mobile merger, and 3) the impact of 5G on macro towers. While one could argue that the initial impact of Sprint/T-Mobile could be positive, as the combined company moves quickly to upgrade sites while decomms would not start right away, one can also make an argument that the combined company will look to accelerate decomms and that tower operators may trade away growth for stability.
Regarding 5G, the macro tower 5G opportunity appears in our view similar to the ongoing 4G network investments that are largely focused on improving speed and include things such as densification, MIMO, and supporting new spectrum. At the same time, for the “true” vision of 5G to play out, several hundred thousand small cells will need to get built, which in our view could prove cannibalistic to future macro tower growth. As such, while the marketing buzz around 5G continues to build , it remains unclear to us that it will drive a step function in growth anywhere near what we saw in ~2013/2014 with 4G.
Considering that the direction of growth rates have historically been a good indicator of the direction of tower multiples, while we believe there is upside to each stock over the next 12 months, we believe that stock appreciation could be relegated to at best that of AFFO growth over the next several years which for the sector is close to ~10%. Adding to the risk though is that today’s multiples are still ~2-4x above the trough valuations the last few years. This in our view speaks to a broader view that was conveyed amongst those at the conference that we spoke to that noted that while towers is arguably still one of the best business models in the world, relatively speaking, it may not be as good of a business going forward in light of several factors including in addition a potential rising interest rate environment, private company M&A multiples (which remain high compared to public tower multiples and may at some point need to be reset), and carrier frustration with the current pricing model that over the long-term could bleed down escalators across the industry. In our view, much of this simply reflects the maturation of the industry and by no means suggests that towers is a bad business, but rather the level of stock appreciation for the foreseeable future may be subdued.
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