Wells Fargo Responds to Feedback on Tower Sector Upgrade

UPDATE  Last week Inside Towers reported on Wells Fargo’s upgrade of tower stocks from “Market Weight” to “Overweight” following observations gleaned from personal meetings with tower execs and participation at the Mobile World Congress. That shift in position created some lively feedback for Wells Fargo Senior Analyst Jennifer Fritzsche.

“As to be expected, a lot of the discussion this week was on the heels of our 3/8 tower upgrade,” Fritzsche said. “The feedback was interesting…with three specific (somewhat divided) camps. First camp — those who disagreed outright and questioned how this sector would outperform in a period of rising rates. The second camp agreed with our thesis and logic but questioned our timing. We got a lot of ‘Why do this now if you believe a S/TMUS merger will be announced?” she said.

“What was most interesting,” Fritzsche said, “is that we heard from a TON of clients that think the day to buy the towers is when that deal is announced. We heard that so much that it very much made us question whether the group would actually be down as much as people think that day. Finally, the last camp agreed with the thesis, logic and timing, but disagreed on CCI as our top pick. In fact, only one client out of the many we spoke with this week agreed in our stack rank tower order: CCI, AMT, SBAC (even though CCI has underperformed the other two year to date).”  

Fritzsche added, “It is clear to us that AMT is the darling of investors and SBAC a close second. Investors feel CCI is pricey (on AFFO multiple basis) and still very much question the economics of the small cell/fiber model. Our logic with CCI is simple – the company has the biggest exposure to T (given they own through sales lease-back the old AT&T towers) and our assumption is if/when AT&T wins FirstNet it will likely first touch those towers that they know best/longest. Additionally, checks have shown that AT&T has shown a willingness to work with vendors who check many boxes in terms of network infrastructure. CCI does that with macros, fiber and small cells. UNIT seems to be following a similar approach (although on a much smaller scale, of course). While CCI does have the largest exposure to TMUS/S overlap (8% of CCI’s rental revenue from sites where S/TMUS overlap, with 5-6 years on average remaining), we believe the difference between AT&T actually coming back to the spending game vs. TMUS slowing (assuming that occurs due to merger) is a net positive. Meaning – T spending again more than offsets TMUS possible slowing,” she said.

“In this discussion, we put S aside as they have not been contributing to the towers revenue in a meaningful way for a number of years,” according to Fritzsche. “Additionally, we are not convinced that, even in the face of a S/TMUS merger, TMUS would actually slow – especially if they walk away with a boatload of 600 MHz spectrum at what likely will be garage sale prices!”

March 13, 2017

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