In my last post I dipped my feet into the Real Estate pool by analyzing Allied Properties and Prologis, and as I pondered which company I should discuss in this article, I figured why not keep the REIT Train Rolling?? So this post will cover Cell Tower Giant, American Tower Corporation (Ticker: AMT).
I’ve been following this particular REIT for quite some time, and while I’ve yet to invest in the company, I’m strongly considering doing just that as its shares are down about 30% from their all-time high.
So what exactly does AMT do? Well, they operate just like your average REIT (or AP-UN.TO or PLD if you read the last post) in that they own real estate, which they earn revenue from by leasing it out to tenants. However, in AMT’s case, rather than having a portfolio of office or storage space, they own and operate communication sites (around 223,000 of them globally, to be precise)—their tenants/customers paying for cell tower usage are major telecom companies like AT&T (Ticker: T) and Verizon (Ticker: VZ).
Looking at the industry, I think it’s quite useful to look at Buffett’s quote about barriers to entry; so is American Tower (the economic castle) fortified by “an unbreachable moat” within the communications real estate industry? I’d argue yes…let’s first circle back to that 223k number, which is a staggering figure. Given the large investment required to build 1 cell tower (let alone north of 200k), AMT’s sizeable tower portfolio would be pretty daunting for potential entrants. Furthermore, AMT is also protected from the standpoint that they have long-term contracts locked in with their customers, further deterring new entrants from entering the industry. That moat seems to be widening by the minute, right?
Over the last decade, AMT has increased EBITDA by nearly 320% (See Exhibit A)—the company historically has grown revenue through new builds/acquisitions and same-property growth, with the latter being arguably the most attractive. As I mentioned, cell tower construction (and acquisition) requires a lot of up-front capital; however, once towers are up and running, AMT can quickly scale through adding new tenants to existing towers. This process significantly boosts profitability as many of the company’s costs are fixed (therefore they don’t tend to increase with the addition of new tenants), while revenue is doubling when a 2nd tenant is brought on. The towers have the capacity for hosting several tenants’ equipment, and the best part is that the carriers pay for their own equipment and upgrades (e.g. transitioning to 5G). Unsurprisingly, the difference in tenants per tower has major ROI implications—AMT says that ROI for 1 client is in the mid-single digits, whereas the return for three tenants/tower is in the low-20s range (much more attractive!!). As a result, AMT’s bottomline has seen consistent growth—profit margins have gone from 16% to 27% between 2016-2021.
Looking ahead at AMT’s growth prospects, there are some clear secular tailwinds—firstly the ever-increasing data usage among consumers like you and me, which requires telecoms to invest in additional communication sites, thus benefitting tower owners like AMT. You may have heard the term “Internet of Things (IoT)”—it basically just refers to devices that exchange data with one another over the internet/other communications networks—why do we have to complicate everything with these weird acronyms nowadays, anyway?? Nevertheless, AMT is projecting that the number of IoT devices will grow from the 2022 figure of 248 million to 581 million in 2027, equating to a CAGR of 19%.
As more devices come online, it makes sense that data usage would increase; however, that’s only half of the equation. We’re also seeing immense progress in terms of mobile phone capabilities, and as the complexity of these gadgets increases, so too does their data usage. It’s pretty difficult to go anywhere in public these days without seeing someone playing a video or game on their phone—AMT estimates that due to the widespread adoption of things like streaming, TikTok, and mobile gaming, mobile data traffic will grow on a per device basis from 1GB per month to 2.7 GB/month over the next 4 years (CAGR of 22%). See Exhibit B
The final aspect making AMT’s runway for growth appear even longer is the untapped potential of the emerging markets. Specifically, many of these nations are just now gaining access to these advanced devices for a reasonable price (with plenty still awaiting this opportunity), which should also raise usage. Furthermore, wireless network development in some of these international markets are 10 years behind the U.S., thus carriers will be on the hook for massive tower investment as they make the switch to 4G and 5G.
These trends are no doubt very encouraging for AMT’s future growth, but let’s take a look at the all-important valuation. The stock’s slide from its all-time high presents a much more enticing entry point as it appears to be undervalued relative to its historical performance. Shares are currently trading at an EV/EBITDA multiple of about 20x (See Exhibits C and D), notably lower than its 5 and 10-year EBITDA multiples.
AMT’s EV/EBITDA multiple also appears to be undervalued compared to its peers as it trades below the industry average (See Exhibit E).
To conclude, I think AMT is well-positioned to capitalize on the immense growth opportunities that are coming their way. The stock is very fairly priced at the moment, and I didn’t even mention the dividend (currently yielding about 3%…nearly the company’s all-time high), which has grown for 10 years in a row. What appeals to me most about AMT is the balance it’s able to strike between return and risk—it delivers very solid returns (through price appreciation and dividends) while being a recession-resilient business (remember those long-term contracts I mentioned earlier??). Given the need for AMT’s infrastructure regardless of the economic backdrop (worth noting its beta of just 0.55), I don’t foresee the company having much difficulty in a potential upcoming recession, and the Fed cutting rates later this year or in 2024 would do wonders for AMT’s bottomline as they have a fair bit of debt on their balance sheet. In my opinion, all signs point to a buy for this stock, and I plan to add AMT to my portfolio in the near-term.