Several portions of the economy bypassed the U.S. recession
three years ago and its subsequent baby-step recovery. Farm
incomes soared steadily throughout. The domestic U.S. energy
sector boomed and remains starved for skilled workers.
In technology, Americans continue to gorge on mobile gadgets
and wireless data. Sales of smartphones, tablet computers and
other devices using mobile Internet connections have grown at
double-digit rates per quarter ever since Apple introduced the
very smart iPhone in 2007, followed by its revolutionary tablet
Consumers gobbled up more than 1.1 trillion megabytes of data
for the 12-month period ended in June, according to the latest
survey by CTIA -- The Wireless Association. That's up 104% from
the same period in the prior year.
The report also said about 41% of mobile users now own a
smartphone nationally.AT&T (
) said about 64% of its customers, at the end of September, were
smartphones users. AtVerizon Communications , (
) it's about 53%.
Keeping pace with this traffic requires substantial
investments in wireless infrastructure. One of the most basic
needs are cell sites, which are primarily the towers in cities
and along roadways that hold the cellular transmission and
The three largest providers of cell-phone towers in the U.S.
areAmerican Tower (
),Crown Castle International (
) andSBA Communications (
All three stocks have soared in the past year. That, in turn,
has boosted the Telecom Services -- Wireless group to a No. 32
ranking among the 197 industries tracked by IBD.
Wireless networks are expanding coverage -- the area served by
their specific service. Many are also advancing into faster 4G
networks and 4G LTE, also known as long-term evolution, the
highest grade of 4G.
Both of these trends have helped accelerate the demand for
In addition, as wireless data speeds have increased, so have
software applications. Today's technology and software put what
once would have been considered supercomputers into the pockets
Those devices demand more speed as well as more capacity from
network service providers.
"Across the spectrum all wireless providers are in the midst
of significant upgrades to 4G, a process that benefits the tower
companies," said Michael McCormack, analyst with Nomura Equity
Research. "We continue to see strong demand in subscriber growth
and data usage."
Verizon reports that sales of 4G LTE mobile devices have risen
steadily every quarter since it first launched the service in
late 2010. It now has 15 million customers with 4G LTE phones and
Francis Shammo, Verizon chief financial officer, said in a
conference call with analysts after the company posted
third-quarter results on Oct. 24 that 25% of its smartphone users
now run on 4G LTE.
"We expect these percentages to continue to ramp as all new
smartphones in our device road map will be 4G LTE," he said in
The Tower Business
Cell tower providers lease antenna space not only to wireless
service companies, but also to radio and TV broadcasters,
governments and other industries. The tower companies own and
maintain towers and rent the space. Most towers can handle about
four or five tenants, though the average for now is about three.
Tenants generally lock in long-term leases. Renewal rates are
high and tower and site maintenance costs are minimal.
In the early days of wireless, service providers like
AT&T, Verizon, Sprint-Nextel and T-Mobile owned and
maintained most of the towers. As wireless usage continued to
expand, it became clear that multiple operators sharing the same
tower was a better and less expensive way to go. The big-name
providers offloaded assets. Tower sector middle men expanded to
fulfill the need.
A single tower used by just one tenant costs roughly $316,000
to build and maintain over a 10-year period, according to
McCormack. As renters, wireless service providers pay about
$195,000 over that 10-year period, cutting their costs by more
than a third.
The tower companies generate almost all their revenue from
these leases. Operating and maintenance costs are relatively low
once they are up and running. Analysts estimate about 35% of that
rental income is typically free cash flow.
According to CTIA, wireless operators had 285.6 million
cellular transmission sites in operation at the end of June, up
11% from a year ago. That is a sharp acceleration from the 2%
growth in cell sites from the year before. There were 322 million
active cellular subscriptions in the U.S. as of June, up 5% from
the prior year. That's more than the U.S. population, as some
subscribers have multiple accounts.
A 16-Fold Increase
Another measure of industry expansion comes from the capital
spending of wireless carriers. Nomura estimates $29 billion in
wireless industry capital spending in 2012, up from $26 billion
the year before. McCormack estimates a steady pace of spending in
the range of about $28 billion per year over the next few years.
All this translates into increased levels of business for tower
"Clearly the mobile Internet is the most pervasive trend
driving consumer behavior today and we are well positioned to
benefit from this growth in mobile data traffic," said W.
Benjamin Moreland, president and CEO of Crown Castle, in a
conference call with analysts after the company posted
third-quarter results on Oct. 25. Moreland said research suggests
a 16-fold increase in mobile data traffic between 2011 and 2016,
fueled by the faster and more robust 4G networks.
During the third quarter Crown Castle entered into an
agreement to acquire 7,200 towers from T- Mobile USA for $2.4
billion, raising its U.S. portfolio to nearly 30,000 sites.
There is also an international market to be mined, providing a
return on investment similar to U.S. tower operations.
On Nov. 15 American Tower announced that it would acquire
2,000 towers in Germany from KPN for about $503 million. American
Tower operates about 21,900 sites in the U.S. and another 29,000
SBA Communications recently closed a deal to acquire 3,256
towers from TowerCo., the fifth largest independent tower
company, for $1.45 billion in cash and stock. The deal raised
SBA's total to more than 16,500 towers. SBA Communications has
increased its tower count by about 60% from the beginning of the
"We believe our initial 2013 outlook is strong with potential
opportunities for improvement throughout the year," said Jeffrey
Stoops, president and CEO of SBA, in a conference call with
analysts after posting third-quarter results on Nov. 6.
Two things could potentially disrupt the business of tower
operators. One is a harsh decline in global economies that could
tighten the availability of loans. The other is industry
consolidation among the wireless carriers. In the consolidation
scenario, said McCormack, it could enable the new entity to shed
or share tower assets.
That concern recently loomed large when T-Mobile USA, which is
majority owned by Deutsche Telekom, struck a deal in October to
acquire MetroPCS for $1.5 billion in cash, in addition to stock.
A closer look by analysts eased the fears, said McCormack.
"The belief is that wireless industry consolidation is a
negative," said McCormack.
But the Federal Communications Commission has concerns about
that as well. When AT&T sought to acquire T-Mobile for $39
billion last year, objections by the FCC and Justice Department
fueled a collapse of the deal.
"A key theme of investing in tower companies has always been
dependability and visibility going foreword," McCormack said.