U.S Towers Idling on Neutral: Valuations, Ruminations

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The most common tower-related question Nick Del Deo at MoffettNathanson has received this year is: “how are the Towers trading at these levels?” Del Deo said he’s  been surprised that “the Towers” have reached the prices that they have, which are well in excess of their prior target prices (and consensus targets). 

“Some of the common narratives that are out there,” Del Deo said, “like the impact of real estate investors or a pending bump from 5G, haven’t struck us as entirely satisfactory.”

As such, he said it seemed like an appropriate time to perform a valuation deep dive. Investors typically cite absolute multiples in the context of historical ranges to argue these stocks are expensive or cheap. While a good starting point, Del Deo said there are other (interrelated) factors to consider, including: prevailing market multiples; the effect of changes in the corporate tax rate on the relationship between tower and market multiples; the changing composition of towerco portfolios; fluctuations in interest rates and the cost of capital; changes in the investor base; and changes in their growth outlooks.

“While it takes a lot of work to quantify their impact,” he said. “The results are actually quite enlightening.”

Additionally, he said one needs to consider how changing expectations regarding the impact of the T-Mobile/Sprint deal have influenced prices, specifically the potential benefits of a “new fourth player.” While anything written on this topic is likely to be quickly out-of-date, Del Deo said, it plays an important role in explaining the recent stock action.

Del Deo feels tower valuations are not as egregious as they first appear after considering the aforementioned factors, and said it is appropriate they raise their target prices. “Even so, they do not offer much upside,” he said, “SBA remains the most attractive of the three, but we can no longer argue it is undervalued enough to justify a Buy rating, and as such downgrade it to Neutral. We now rate all three of the Towers Neutral.”

July 9, 2019

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