Cellular Tower Firms Seen As Mixed Bag By Telecom Investors
Fri Jul 16, 7:00 PM ET
Mike Angell
Some people hate them. Some want more of them. But are cell phone towers a good investment?
Stocks in tower firms have risen along with other wireless stocks over the last year. Nonetheless, most tower firms are losing money. And they carry some $7 billion in debt.
Much of their profit has been eaten up by debt and the building of new towers. But many tower firms have pared down debt and capital spending. That means these stocks may shine, says one analyst. Plus, carriers will need more towers as they boost coverage and whisk more high-speed wireless data.
"It's a real interesting business," said Smith Barney analyst Michael Rollins. "There are favorable subscriber growth rates, the carriers' goals are to improve quality and coverage, and there are new services being offered."
The three big tower companies are American Tower (NYSE:AMT - News), Crown Castle International (NYSE:CCI - News) and SpectraSite (NYSE:SSI - News).
They control a quarter of the 180,000 stand-alone and rooftop cell towers. These firms also run TV and radio antennas.
Carriers lease space on these towers to fill coverage gaps. SpectraSite's big customers are Nextel Communications (NasdaqNM:NXTL - News) and Cingular Wireless. American Tower and Crown Castle count Verizon Wireless as a big customer.
Good coverage is especially important to wireless providers now that customers can switch carriers and keep their numbers. Carriers also plan to offer high-speed data service known as 3G, which requires better coverage.
That should help drive cell tower industry sales, which Rollins expects to rise 6% yearly through 2008.
"It's a situation where industry trends are helping all the companies," Rollins said.
These companies spent lots of money to build tower portfolios. Now they're cutting capital spending. Less spending means more money for earnings.
"They have huge incremental margins," Rollins said.
Tower companies have restructured much of their debt. SpectraSite filed for bankruptcy back in 2002. That cut $1.76 billion in debt. It also trimmed the interest expense on SpectraSite's remaining debt of $639 million.
With more cash freed up, tower companies can do more for shareholders. They're poised to reward investors after years of losses, Rollins says.
"They could consider stock buybacks and dividends," he said. "These companies have become much more disciplined with their cash flow."
But there are reasons tower companies may have dimmer futures, Rollins admits.
Telecom mergers such as the Cingular-AT&T Wireless deal mean customers have more buying power. Plus, merged carriers have redundant tower leases.
Both Cingular and AT&T Wireless have 350 duplicate towers leased from American Tower. Crown Castle has 837 towers leased to the two merging companies.
Overall, AT&T Wireless and Cingular have as many as 8,000 to 10,000 duplicate towers.
Another potential problem: New wireless gear allows more users in the same amount of airwaves. Cell sites can handle 1,400 voice calls per hour vs. 600 in previous years. More efficient gear means less space is needed on cell towers.
Rising interest rates also may crimp tower stock earnings. Rising rates affect about $600 million of American Tower's $3.2 billion in debt. About $1.4 billion of Crown Castle's $3.4 billion debt is tied to floating interest rates.
While Rollins says the industry overall will do well, some stocks may do better than others.
Crown Castle's shares aren't poised for as much growth as those of American Tower or SpectraSite, he says.
"American Tower and SpectraSite have significantly more upside with similar levels of business," Rollins said.
But not everyone has the same outlook. Wells Fargo has downgraded American Tower, saying the shares have peaked. The company trades around 15, up 13% this year. |
