Description

This thesis is relatively simple: American Tower today trades at a multiple of FFO that is almost exactly the S&P 500 P/E average despite possessing far better than average business characteristics. If VIC members were to contrive of a business from scratch, it would be something close to the tower business. 

The stock is down around 25% from its peak in the summer in part due to concerns around churn from the recent Sprint/T-mobile merger which will cause near term slower revenue growth but ultimately doesn’t change the value of the business by anywhere near that magnitude. In addition, the stock is down around 9% YTD as it has likely gotten swept up in the recent tech purge/sector rotation around rates.

Consider some of the primary attribute of AMT/the tower business:

1. Scarcity: existing real estate footprint that is extremely valuable given zoning for towers and strong NIMBY factor. Basically no town wants to put up any more of these than already exist because they are eyesores.

2. Organic Growth: Decades of history of demand growth due to all the factors around data consumption that we all are familiar with. From 2020-2026, data usage per device (devices are growing as well) is expected to increase by 20-25% per annum in the United States. Projections for many of AMT’s international markets are higher as well. 

Overall the company believes it can sustainably (over the next decade) grow revenues mid-single-digit percent and AFFO/share in excess of 10% per year. This is supported by contractual escalators of 3%, new business of 4-5% less normalized churn of 1-2% as well as margin expansion and capital allocation. Though the next year or so will be challenged (in part why stock has gone down significantly), there are numerous potential bullish tailwinds over the medium/longer term which could spur further growth-- 5G, new networks following spectrum auctions, new dynamic data applications, etc.

3. Strong Unit Economics: The tower model is extremely strong financially assuming the requisite number of “tenants” on its towers. The company estimates on a sample tower that costs around $275,000 to build, it can generate 24% ROIC (using operating margin) with 3 or more tenants. Essentially the variable costs to adding revenue on a tower are extremely low with conversion of revenue to margin at 97+%. In addition, the capital requirements on an existing tower (lighting systems, fence repair, upkeep etc) are also extremely low average around $1,500 per year per tower in the United States. American Tower also does high ROIC redevelopment (shared costs with tenants generally) as well as discretionary and start-up projects to grow its sites. As well, normalized churn is very low in the 1-2% range.

4. Great Track Record: In the last decade the company has grown AFFO at a 14.8% a CAGR despite its continuing to grow in scale. The company has allocated capital well over the years and has been active in both international acquisitions, new growth projects and opportunistic buybacks. Currently the company pays a dividend yield of around 2.5%

T-Mobile/Sprint Merger: AMT does face elevated churn for the next year or two as a result of this recent merger. The company has said that its usual 100-200 bps of churn could increase by 150-200 bps during 2021 and 2022. While this is obviously not preferable, it doesn’t really alter the valuation case for the company that significantly. To put some context around, the company is estimating that it will grow AFFO per share around 8.5% this year, less than it’s overall expected CAGR for the next decade of double digits. 

The company also is still dealing with the impact of churn from carrier consolidation in its Indian market where it has a sizable business. This churn should also fully roll off over the next few years leading to strong growth in that market where overall data consumption is growing extremely fast and the carrier market will be stable post mass consolidation.

Balance Sheet: in January, AMT announced the acquisition of Telxius Towers which will enhance its footprint primarily in Germany and Spain. This takes the company’s leverage up above its target range of 3-5 net debt / EBITDA to the high 5s range. The company plans to pay off debt in order to work its way back down to its target leverage range and to continue to operate with an investment grade credit rating.

Conclusion: With the AMT’s combination of defensive, consistent cash flow characteristics and reliable & significant long term future growth, I believe it is entirely reasonable that the company should trade at a significant premium to the S&P 500. In a world where 10 year bonds have ROCKETED up to current levels of around 1.59%, it seems eminently reasonable that AMT, with its predictable growth and attractive business model, should trade at 25-30x next year’s cash flow where it has in the past. I believe buying the stock now and waiting a year until the company’s T-Mobile/Sprint related churn is near an end will enable the purchaser to benefit from an easy to predict potential multiple re-rating and resultant share price appreciation. 

Catalyst

Buying and holding for a year or so until investors can see to the end of the T-Mobile/Sprint related churn and a return to faster growth beyond that