To The Moon

It was another turbulent week for stocks, as big tech earnings pulled the market lower ahead of next week’s Fed decision. The best-performing concepts are telecom tower REITs, online education and China education stocks.

Considering the different perceptions of the stock, this time TigerPicks chose $American Tower(AMT)$ to have a fundamental highlight to help users understand it better.

$American Tower(AMT)$

Demand for 5G networks continues, and one of the best ways to benefit from this is by investing in a company like American Tower Corporation right now.

It operates a vast set of communication networks across the US and has come down quite a lot in price as well over the last 12 months, down around 26%. It offers a near 3.5% yield right now and is in my opinion in the buy zone as the technical chart seems to suggest a bottom is being found, and a rebound upwards is imminent.

Company Segments

AMT, a prominent global Real Estate Investment Trust (REIT), stands as a key player in the realm of multitenant communications real estate. With an extensive portfolio comprising close to 226,000 communications sites, the company holds a significant presence in the industry. Moreover, AMT boasts a highly interconnected footprint, including a network of data center facilities across the United States. This strategic positioning underscores the company's pivotal role as an independent owner, operator, and developer in the field of communications infrastructure.

The growth of data for the company

Data Growth (Investor Presentation)

One of the leading momentum builders for AMT right now is the increased usage of data traffic per mobile user. This is expected to grow at a CAGR of 12.5% up until 2028 as seen in the chart above. Tailwinds such as these are why I remain so bullish on the company and the prospects of raising the dividend even further. The data center segment for the company saw solid leasing growth in the last quarter, so AMT is firing on all cylinders right now in terms of growth I think.

The demand the company is facing

Company Demand (Investor Presentation)

Historically, the company has managed to have very solid growth for both the top and bottom lines of the business. It has done so by continuously investing and expanding, which has built up the debt levels significantly, but also yielded a strong investor return. Most recently, AMT has been venturing into the data center segment over the past few years, with ambitious plans to further grow its data center portfolio.

Although this currently represents approximately 8% of its total revenue, the company is actively pursuing expansion in this area. This strategic move positions AMT as a direct competitor to industry players like EQIX, DLR, and IRM. What sets AMT apart is that it combines the stability of a tower REIT with the growth potential typically associated with data center REITs. If its data center revenue experiences rapid growth, it could lead to a substantial increase in the company's overall value, offering investors an attractive proposition.

Valuation

AMT is currently trading in close proximity to its 52-week low, with shares priced at around $163. This recent downturn aligns with a broader trend in the REIT sector, where many companies have experienced declines in their stock prices. One primary contributing factor to this trend is the relatively low yields offered by REITs, and while AMT boasts an attractive yield of nearly 4%, it still falls short of the current average yield for Treasury bills.

Moreover, AMT's P/AFFO ratio is currently trading significantly below its five-year average. This presents an uncommon opportunity for investors, as such deviations from the historical norm are relatively infrequent and can indicate substantial potential for upside in the stock.

The dividend summary for the company

Dividend Summary (Seeking Alpha)

Looking at the dividend summary for AMT, I find it rather appealing as the payout ratio is not abnormally high at 65%. A high payout ratio would be along the lines of 90 - 95% instead. This leaves room for AMT to raise the dividend in times when the earnings may stagnate or not grow as fast. I am still bullish on the earnings prospects of AMT, but what I find further reassuring about the company is the cushion that investors get, knowing AMT could raise the dividends without jeopardizing their earnings distribution strategy too much. By this, I mean they can afford to have a higher payout ratio for a short amount of time and still deliver on their already 10-year consecutive run of raising the dividend.

Risks

The remarkable surge witnessed in U.S. equities throughout this year has undeniably resulted in numerous success stories. Yet, it's important to note that not every sector has enjoyed this strength. One sector that has faced challenges amid this rally is real estate investment trusts, often referred to as REITs. This sector typically exhibits a defensive and income-oriented nature, making it less appealing during a bull market. As such, REITs have encountered headwinds in the current market climate.

The share price of AMT

Share Price (Seeking Alpha)

For those that seek to capitalize from short-term momentum, then I wouldn't suggest AMT to be a buy right now, but rather a hold. The sector it's in may not be prone to the same rally as perhaps tech companies are, but that isn't to say it won't be a good long-term addition to a portfolio, that is still a view that I hold true.

The rising debt levels for the company

Debt Levels (Macrotrends)

AMT is currently wrestling with a mounting debt load that seems to expand relentlessly. Servicing this debt has become more costly over time, and the situation is exacerbated by deteriorating profit margins and a lack of substantial revenue growth. These challenges are placing significant pressure on the company. The hope is that the asset base that AMT holds will continue to appreciate in value and that they can leverage this into stronger earnings for business and service the debt that they have gathered up so far.

Q3 highlights and near-term catalysts

In its Q3 earnings, AMR reported strong results, beating analyst expectations on both revenue and net earnings. I view the growth in its core wireless communications infrastructure business and its CoreSite data center business as the key drivers for such strong performance. Management raised its full-year 2023 Property Revenue midpoint by ~$60 million compared to the prior outlook (from the previous $10. 88 billion to the current $10.94 billion). In terms of the bottom line, the AFFO guidance was raised to $9.79 per share, up from its previous guidance of $9.7.

Next, I will elaborate on the implications of these updates for the long term. Specifically, I will explain A) why I expect the above growth drivers to continue well into the future given the secular demand for mobile data, and B) why the valuation multiples are made even more attractive by the updated guidance.

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AMT Q3 earnings report

Long-term prospects

As detailed in my blog article, in the long term, the growth of any business is ultimately governed by two forces: Its return on capital invested and its plow back ratio (aka, the reinvestment rate). I see AMT in a strong position on both fronts.

Let’s first look at its long-term return on invested capital as shown by my analysis below. As you can see, its return on invested capital was on average 10.4% in the past decade, well above its cost of capital (approximated by the WACC, Weighted Average Cost of Capital). Also, note that the return on invested capital is different from ROE because the book value is typically not the same as capital actively needed for the operation of the business. In AMT’s case, its ROE has been even higher.

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Author based on Seeking Alpha data

In terms of reinvestment rate, American Tower's financial position is quite strong. As seen from the chart below, its net leverage has been stable in the range of 5.0x to 5.4x in recent quarters. Most of its debt (77.5% at the end of the third quarter) is fixed rates and won’t be impacted by rising interest rates. Management has quite a bit of flexibility in terms of capital allocation and they have been doing a sensible job. They reiterated the importance of dividend growth and plans to allocate ~2/3 of the earnings on dividends and ~1/3 on capex (with a minimal amount of M&A), a well-balanced approach for investing in new growth opportunities and return capital to shareholders.

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AMT Q3 earnings report

I see plenty of growth opportunities for AMT to invest its capital. As aforementioned, I expect strong demand for its wireless communications infrastructure in the years to come. The fundamental drivers include the rollout of 5G networks and our increasing use of mobile data services. I also expect the growth of its CoreSite data center business to remain robust in the years to come. The key driver here involves the strong demand for data center services from cloud computing providers and other enterprise customers.

The combination of secular demand, stable profitability, and capital allocation flexibility is a powerful combination for growth. All told, consensus estimates project its FFO to grow at a CAGR of 7% in the next five years.

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Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

The 16 analysts offering 12-month price forecasts for American Tower Corp have a median target of 205.00, with a high estimate of 259.00 and a low estimate of 169.00. The median estimate represents a +19.14% increase from the last price of 172.07.

Resource:

https://seekingalpha.com/article/4643813-american-tower-i-agree-with-wall-street-on-this-one

https://seekingalpha.com/article/4638519-american-tower-stock-strong-addition-to-portfolio

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