Cell Tower Stocks Look Attractive As Data Hungry Devices Like Smartphones and the New iPad Come Online (CCI, AMT, SBAC)

January 27, 2010 5:03 PM EST
There has been a barrage of cellular company ads that have fired accusations about which company has the best coverage in the U.S.

Whether its Verizon's (NYSE: VZ) "There's Map for That" ads buying up all the airtime, or Luke Wilson offering a somber clarification on just how "fast" AT&T (NYSE: T) network is, one thing in coming in quite clear. Cellular companies will need to add and upgrade towers to keep up with demand by consumers.

The consumption of data-hogging smartphones across all networks has caused more headaches than cellular companies care to handle.

A prime example of the problems that smartphones are beginning to cause is the Apple Inc. (NASDAQ: AAPL) iPhone taking down networks and not working in major cities due to over loading the towers. Not to mention the latest data-dumpster, the Apple iPad which will be taking down AT&T networks starting in two months.

The potential of smartphones to bring information directly to the consumer in an instant from anywhere is limitless; however there are limits to what the device will be capable of as long as the network technology remains inferior.

The future of mobile communications will be as bright as the networks make possible and that future will be built by the leaders in the cellular industry, starting with the Cell Tower companies.

Recently Goldman Sachs added Crown Castle International (NYSE: CCI) to its Conviction Buy list, as the cell tower subsector is the only one with an attractive coverage view from the firm’s analysts.

Crown Castle was added to the Conviction Buy List based on the best outlook of increased guidance, and the analysts believe that their previous straight-line revenue concerns are now more than accounted for in the stock.

In addition to Goldman raising the price target on Crown Castle to $46 from $42, the firm also increased the 12-month price target of American Tower Corp. (NYSE: AMT) to $53 from $52, and SBA Communications Corp. (NASDAQ: SBAC) to $43 from $40.

Goldman Sachs maintained a Buy rating on American Tower, while SBA remains on the firm’s Conviction Buy List. The analysts added that the risks to the future value of tower stocks are consolidation and femtocell technologies.

A femtocell, also known as an Access Point Base Station, is designed for use in homes or small offices as a small cellular base station.

Credit Markets remain wide open for cell tower companies at attractive rates. Crown Castle and American Tower have each made recent moves in financing for expansion.

American Tower was in fact upgraded to investment grade last month by both Moody's and Standard & Poor's. The company subsequently issued $500 million in 5 and a half year unsecured debt at 4.625 percent, marking the lowest rate coupon debt that it has ever issued. Crown Castle has made similar maneuvers in recent months.

Goldman Sachs lowered its Weighted Average Cost of Capital for all three of the tower companies listed above, due to the recent financing and messaging around capital structure.

An individual look at the companies can start with Crown Castle, which Goldman Sachs cited as attractive due to the benefits that the company receives from lease extensions with a major carrier whereby straight-line revenue account had gained a surge in the third quarter.

The analysts see Crown Castle continuing to exceed expectation as the company has strong exposure to the upcoming Clearwire (NASDAQ: CLWR) market builds.

Clearwire could be the component that makes Crown Castle or other cell tower company's transition into the 4G networks, as the company currently over-indexing top 100 markets for its launch plans of next-generation of cellular.

Crown Castle derives the majority of its business from renting space on its towers through long-term contracts in various forms, including license and lease agreements. The company's towers can accommodate multiple customers for antennas for such operations as the transmission of wireless signals for mobile devices.

As the demand for real estate in the wireless arena heats up, companies like Crown Castle will hold the keys. Demand will drive the price for the use of the company’s towers, and there seems to be no end in sight for the number of devices that need these towers to operate.

Goldman Sachs sees the recent underperformance of Crown Castle relative to American Tower and SBA as not being a trend, but instead a strong entry point for investors.

American Tower operates towers that it is able to lease out to other companies to use to transmit wireless signals, but the company also offers tower-related services in the U.S., including site acquisition, zoning and Permitting services for network structures.

The company's stock has rebounded since the height of the economic crisis when the industry suffered a time of pull-back as a whole. The shares of American Tower are up nearly $17 since February 2009 to a current value of $42.66. In recent weeks shares of American Tower are pushing closer to all-time highs as the stock has been trending upward for 11 months.

American Tower currently operates a total of 23,700 communications sites, growing in May 2009 when the company acquired XCEL Telecom Private Ltd.

SBA will be another company to keep an eye on as the growth of cellular networks exponentially expands. The company independently owns and operates wireless communications towers, as it also holds all of the outstanding stock of SBA Telecommunications Inc.

The secondary business of SBA has it developing sites and assisting third-Party wireless service providers in maintaining its own wireless service networks.

SBA shares have seen a similar upward trend since the peak of the economic downturn to that of American Tower.

The stock for SBA hit bottom of $17.97 in mid-February 2009, but since has nearly doubled to a current value of $34.97 in less than a year.

Clearwire will be a key to the implementation of 4G networks over the next two years. Goldman Sachs sees the rate for the company to expand that it current has set as conservative. Clearwire has only initiated deployment on less than half of the 80 million POPs it has targeted to add in 2010. Clearwire has resolved its funding gap and is set to expand the use of 4G signals as data consumption is more than ready.

There will be no slowdown in the number of devices and ways to connect to wireless signals, and the investors in the proper companies that set the bar of expansion in the industry will reap the benefits.

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