didn't make it onto the
RecommendedList when insiders purchased
in September. But more insider buying in November prompted another look at this communications infrastructure play.
The bottom line: Now that the stock has fallen into the single digits(on Friday it closed at $8.16), the risk/reward of taking a position inthis EBITDA-positive industry leader now seems worthwhile.
American Tower builds towers and rents space on them to telecomcompanies, which need the infrastructure to hang their cellular, PCS, radio,TV and other equipment.
Shares of cell-tower operators are trading near yearly lows and nowsell for just a fraction of their peaks. But the sector is fairly healthy onmany levels. Revenue is strong and major players have been able to survivethe cutthroat price wars that traumatized much of the telecom industry.
Like other players in the industry, American Tower has plenty of debt. But it's also generating plenty of cash flow. Liquidity concerns are further mitigated by the wireless industry's ongoing growth, and tower leasing prices have remained reasonably firm. Also, the demise of weaker players allows stronger companies like American Tower to get back on their feet as they garner a bigger slice of the pie.
It's a lucrative pie, too. New tenants are paying an average of$1,425 a month to lease space on a cell tower. Rents have stayed in the$1,400-$1,500 range for several years, even as other segments of the telecomindustry have seen pricing plunge by more than half. Rents for cell towerspace would likely have been climbing were it not for the fact that keyplayers were continually building new sites.
But the heavy debt load caused by the past building binge is now abigger worry than missing out on a new tower site. As a result, AmericanTower and its key competitors, such as
, are nowradically scaling back expansion plans. American Tower plans to post $275 million to $325 million in capital expenditures in 2002, down from the approximately $500 million in capex so far this year. As players curtailnew site development, existing sites will become more valuable.
Meanwhile, demand for wireless services keeps rising, as seen in thestrong quarterly results of major operators such as
. Admittedly, growth has been affected by the demise ofupstart wireless service providers such as
"The tower companies, though, have learned from thesesituations and have become far more diligent as to who goes onto theirtowers," notes Lehman Bros.' John Bensche. American Tower's present topcustomers include AT&T Wireless Services, Sprint PCS,
Shares of American Tower fell sharply in November after the companymissed estimates. But most of the shortfall came from the services segmentof the company's business. Services are now expected to generate 13% ofAmerican Tower's cash flow next year, down from 17% this year.
But the core tower rental business is picking up the slack, and shouldgenerate over 80% of cash flow next year.
Bucket-type rate plans, which offer a certain number of minutes permonth at a set price, are a definite near-term driver for increasing towerrentals at American Tower and its peers. These plans increase demand for a provider's network, and prompt them to set up equipment on more towers to handlecustomers' needs. Hanging new equipment for new communications technologies(like 2.5G) should also keep rental demand high in the coming years.
American Tower is in good financial shape to thrive in its newlyrationalized operating environment. It has $338 million in cash, and canaccess another $330 million through a line of credit. The company thinks it's fully funded to positive free cash flow, which should be achieved during 2003.Analysts expect the company to have $850 million in cash to spare at that time. As the company scales back expansion plans, American Tower's cash flow is also expected to increase 29% annually over the next three years.
So American Tower has survived an awful year that saw its stock collapse87% before rebounding recently. As the company and its peers increase cash flow,investors are likely to revisit this industry and bid shares up even more.Exactly how much more is difficult to say. Investors' determination of valuation on cash flow seems more dependent on psychologicalfactors than analysts probably want to admit. How else can you explain thisyear's wild gyrations in American Tower and its ilk this year?
One significant indication of value, though, is that insiders only beganliking the stock when it fell below $13. These execs obviously expect thestock to trade higher. But with a lack of hard valuations for support, I'm treating American Tower as a trading play more than a core buy-and-hold position. The stock obviously has some short-term momentum now, but remember to ratchet up your original stop loss to protect any gains. This market is still not to be trusted.
Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights and founder of the Web site InsiderInsights.com. At the time of publication, Moreland had no position in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland invites you to send comments on his column to
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