SBA Communications: Still An Appealing Play Despite Mixed Quarterly Results

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SBA Communications Corporation reported mixed Q3 2024 results, with earnings per share and FFO exceeding estimates but revenue falling short, leading to a tepid market reaction.Despite revenue decline...

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Shares of the company barely moved even though the business reported earnings per share and FFO (or Funds from Operations) per share that exceeded analyst’s estimates. This lack of optimism might have something to do with the fact that the company fell short of expectations when it came to revenue. However, the company did increase guidance for the entirety of the 2024 fiscal year. So that in and of itself is a net positive. Despite the market’s reaction, or lack thereof, I would say that things are going pretty well for the business at this time. You see, since April of this year, I have been fairly bullish about the company. In an article that I wrote about the business late that month, I called it a “solid prospect” in the telecommunications space. Attractive growth more than offset the fact that shares looked rather pricey on an absolute basis. But ultimately, I ended up rating the company a “buy” to reflect my view that shares would outperform the broader market for the foreseeable future. And outperform the company did. Since then, shares have seen upside of 22%. That's comfortably above the 13.9% increase experienced by the S&P 500. Naturally, a business like this can only warrant so much upside. And I do think that the easy money by this point has been made. But with how the stock is currently valued, both on an absolute basis and relative to similar firms, I would say that the company still makes for a decent ‘buy’ candidate at this time. A mixed quarter I think it would be appropriate to describe the third quarter of the 2024 fiscal year that management at SBA Communications just reported results for as “mixed.” Take revenue as an example. During the quarter, the company reported sales of $667.6 million. That represents a decline of 2.2% compared to the $682.5 million management reported the same time last year. This ended up being $2.6 million lower than what analysts had hoped for. Some of this drop was because of a 1.8% decline in sight leasing revenue. That took those sales down from $637.4 million to $625.7 million.   Author - SEC EDGAR Data This drop was even though domestic cash site leasing revenue for the third quarter grew from $461 million last year to $463.9 million this year. This seems to be driven, at least in part, by the fact that the company increased the number of domestic towers that it has in operation from 17,469 to 17,477. On the international side of things, however, revenue actually dropped from $169.4 million to $160.8 million. That's a 5.1% drop year over year. This might be shocking when you consider that the number of towers that it has internationally increased from 22,077 to 22,285. But it all makes sense when you consider that this drop was actually attributable to foreign currency fluctuations. Without these, international cash site leasing revenue would have risen by 2.8%. That would have resulted in total sight leasing revenue for the company inching up by 0.3% on a year-over-year basis. A small portion of the company's revenue also comes from site development activities. Year over year, this also fell, dropping from $45.1 million to $41.9 million. Foreign currency fluctuations had no material impact on this change. Management did not provide a description of what caused this. But we do know that, for the first half of this year compared to the same time last year, this kind of revenue dropped from $110.6 million to $63.6 million. The company had attributed this decline to decreased carrier activity driven by major customers like T-Mobile USA (TMUS), DISH Wireless, and Verizon Communications (VZ) via its subsidiary Verizon Wireless. In all likelihood, a continuation of this trend caused the weakness in the most recent quarter. Even though the company fell short of expectations on the top line, it exceeded estimates on the bottom line. Earnings per share came in at $2.40. That is significantly higher than the $0.80 per share the company reported the same time last year. It is also $0.25 per share above what analysts had forecast. This translated to an increase in net income from $87.4 million last year to $258.5 million this year. This wasn't the only profitability metric that came in stronger year over year. FFO per share $3.06. This was above the $2.72 per share reported the same time in 2023, and it happened to be $0.12 per share greater than what analysts were anticipating. This resulted in FFO climbing from $297.5 million last year to $330.6 million this year.   Author - SEC EDGAR Data Not every profitability metric improved year over year. In fact, literally all the others came in weaker. Operating cash flow, for instance, dropped from $313.7 million to $304.7 million. If we adjust for changes in working capital, we get a drop from $379.2 million to $367 million. Adjusted FFO, meanwhile, declined from $362.8 million to $356.7 million. And finally, EBITDA for the company dropped from $482.1 million to $472.6 million. In the chart above, you can see results for the first nine months of 2024 compared to the first nine months of 2023. This shows a very similar trend on a year-over-year basis. The only difference here is that adjusted FFO actually increased during this window of time. The disparities that we see between some of these profitability metrics and others relate to a couple of things. For instance, last year, the company had much more in the way of asset impairment charges, decommission costs, and depreciation, accretion, and amortization expenses. This year, however, the firm experienced not only higher site development expenses, but also other higher cash-based costs such as income taxes. For the third quarter of last year, the lower pre-tax profits for the business resulted in taxes of $7.9 million. This year, that figure was $42.3 million. For this latest quarter, a $72 million swing in favor of boosting profitability relative to what was seen last year also occurred, likely in response to the remeasurement of U.S. dollar denominated intercompany loans with foreign subsidiaries.   SBA Communications Despite these signs of volatility, the overall picture for 2024 in its entirety is looking up. Management is currently expecting total revenue for the year of between $2.66 billion and $2.68 billion. This represents a $13 million increase over previous guidance that was issued in July. Adjusted FFO should come in at between $1.43 billion and $1.45 billion. This is $10.5 million greater than what was forecasted previously by management. And finally, EBITDA should be around $9 million greater than what was previously anticipated, with a reading of between $1.89 billion and $1.90 billion. Estimates have not been provided when it comes to other important profitability metrics. But if we assume similar year-over-year changes, we would expect FFO of about $1.40 billion and adjusted operating cash flow of $1.51 billion.   Author - SEC EDGAR Data Using these estimates, we can see in the chart above how shares of SBA Communications are currently priced. On their own, they look a bit pricey. Having said that, higher prices should be made for stable cash cows like this. One thing to help us understand whether the premium assigned to the company is too high or not is the ability to compare it to similar businesses. In the chart below, I took two of the four valuation metrics that I used above and compared SBA Communications to rivals American Tower (AMT) and Crown Castle (CCI). What you can see is that, in both instances, SBA Communications fits between the two on a valuation basis.   Author - SEC EDGAR Data Another factor that we should consider would be leverage. It is great that SBA Communications fits between the two competitors when it comes to valuation. And considering that I am bullish on both of those companies as well, I should by extension be bullish when it comes to SBA Communications. But leverage is important because it can justify a premium or demand a discount. Additionally, as the chart below illustrates, the net leverage ratio of our candidate is, once again, between the two players. It's closer, in fact, to American Tower, but still in between the two all the same.   Author - SEC EDGAR Data I would also like to point out that, before too long, SBA Communications will be larger than it currently is. After the end of the third quarter of its 2024, fiscal year, the company agreed to acquire over 7,000 telecommunication sites in Central America from Millicom International Cellular in exchange for $975 million. These are sites that carry initial terms of 15 years, and they are located in Guatemala, El Salvador, and Nicaragua. Unlike most of the firm's international operations, these have their cash flows denominated in US dollars, so foreign currency fluctuations shouldn't be an issue. Collectively, these towers generate $129 million in annual revenue and $89 million worth of annual tower cash flow. These sites will be leased back to the seller under a term of 15 years, plus another 1,500 sites that SBA Communications has leased to the firm will also be renewed for 15 years. If SBA Communications chooses, it can build another 2,500 sites for Millicom over the next seven years that will also carry 15-year leases. Takeaway  Fundamentally speaking, I would say that SBA Communications has done a fine job. The company might not be the best prospect on the market. But shares have drastically outperformed the broader market in a short window of time. The stock is not cheap, but I wouldn't call it expensive either. And for a business of this quality and stability, I would say that it is appropriately priced for a slightly bullish outlook. Add all of this together, and I think that keeping the firm rated a ‘buy’ makes sense right now.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479231194"}