Cell-Tower Firms Stand Tall In Infrastructure Field

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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 computers.

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 ( T ) said about 64% of its customers, at the end of September, were smartphones users. AtVerizon Communications , ( VZ ) 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 reception equipment.

The three largest providers of cell-phone towers in the U.S. areAmerican Tower ( AMT ),Crown Castle International ( CCI ) andSBA Communications ( SBAC ).

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.

More Wireless

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 towers.

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 of consumers.

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 devices.

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 call.

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.

Site Population

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 operators.

"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 overseas.

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 year.

Outlook

"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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Investing Ideas

Referenced Stocks: AMT , CCI , SBAC , T , VZ

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