The tower leasing model is the most attractive in the broader telecommunications industry. However, a litany of worries has caused many investors to question its durability and whether it is too optimistic to assume that the future will resemble the past. These concerns have weighed on the shares of the Big Three towercos, as evidenced by their ten-year low multiples relative to the S&P and the punitive 1-2% perpetual growth rates implied by current market prices (despite AMT and CCI trading near all-time absolute highs).
We believe this backdrop presents an interesting buying opportunity. The primary concerns we hear from investors can all be allayed. In short:
- There is no reason to think the industry’s pricing model is about to fall apart. Tower leasing is cheaper than any alternative… not that the carriers have viable alternatives. Negotiating leverage rests squarely with the towercos and infrastructure rental cost are a modest share of carrier expenses.
- We do not envision a scenario where small cells hurt the macrosite-tower model in any measurable way. Small cells are a dramatically more expensive solution and will primarily be deployed where towers under-index (i.e., urban cores). Any “capex drain” will be modest.
- The health of the wireless carriers is sufficient to support robust financial performance by the Towers. We project stable carrier ROIC and cash flow generation, and there remains plenty of room for towers to capture value. An entry by cable into wireless might hurt the carriers, but an attendant facilities-based cellular/WiFi hybrid deployment would provide an offset for towercos.
- T-Mobile/Sprint merger risk is definable and modest.
- “Technology” and spectrum availability are not threats. 5G will eventually be a revenue opportunity like 3G and 4G were, not a substitute for macrosites/towers. Cooper’s Law tells us that capacity benefits from spectrum refarming and novel deployments won’t last long, and the current spectrum pipeline presents a long runway for new business.
The challenging part of making an investment like this is remaining confident in the thesis despite the cacophony of ill-informed reasons to doubt it. A successful investor has to act like legendary Greek king Odysseus, who lashed himself to the mast of his ship to resist the tempting calls of the Sirens attempting to shipwreck him. Businesses with sustainable competitive advantages are, by definition, able to frustrate the forces of competition that ordinarily compress a firm’s economic returns down to its cost of capital, insulating them from these sorts of shocks. It is our belief, based on dispassionate analyses of the sources and durability of the competitive advantages that underpin the tower leasing model, that these worries will ultimately prove to be just that: worries. There is no particular catalyst that will make them dissipate save for the passage of time and the failure of the concerns to materialize.
We rate all three public towercos Buy (AMT $130, CCI $112, SBAC $150). However, SBA stands out for offering nearly 40% upside to our target and a large margin of safety, and remains our preferred pick by a wide margin. So long as the wheels don’t fall off the tower leasing model one can easily justify target prices that are well in excess of where the shares are trading today.
Full report (subscription required); disclosures
By Nick Del Deo, Analyst, MoffettNathanson
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