I have to give the Motley Fool Rule Breakers folks credit on this one — they’ve been touting this stock consistently for just about two and a half years now, and it has, despite the fact that it always looks kind of expensive, refused to spend much time going down during that time.
But every time they refresh or rehash this ad, I get a zillion questions about it (not many have the marketing might and massive email lists of the Motley Fool), so we’ve got to let you know that yes, they’re still picking the same stock. And yes, dammit, it still looks expensive to your friendly neighborhood Gumshoe.
New to this story? Well, let me give you a taste of the ad just to make sure you get excited enough …
“One Stock You Must Buy Before the iPhone-Android War Escalates Any Further…
“It’s not Apple. Or Google. Verizon or AT&T. In fact, you’ve probably never even heard this company’s name.
“Yet it’s so vital to the “smartphone” revolution that its stock has doubled time and time again since they first hit the shelves.
“And if industry insiders are right, the rapidly escalating war between iPhone and Android is about to push this stock even higher…”
Who can resist, right? Here’s a bit more:
“… the ultimate win-win wireless investment….
“this company doesn’t own, license, or lease spectrum — but it does provide behind-the-scenes infrastructure that is absolutely crucial to the functioning of virtually all cell phone networks…
“Meaning its value isn’t dependent on the success of any one cell phone brand or carrier….
“… only a handful of highly specialized companies have the state-of-the-art technology and artful know-how needed to build and maintain the infrastructure that allows these cellular carriers to keep pace with this unprecedented surge in demand.
“And the company I’m writing you about today stands head and shoulders above all the rest!
“Thanks to an unprecedented surge in smartphone traffic, demand for cell sites like this one continues to soar.
“Currently, it owns and operates roughly 49,000 ‘cellular transmission sites’ around the world, which it leases out to all major cellular carriers at ever-increasing rates.
“And not only is it the largest company of its kind, it’s also the most profitable.
“Over just the past 12 months, it has cranked out a whopping $738 million in free cash flow — double that of its closest competitor.
“Speaking of which, competition isn’t all that much of a concern here.
“For one thing, favorable zoning laws in many of the places this company operates give it sole control of large amounts of territory.
“For another thing, it sports much higher profit margins and a lower debt-to-capital ratio than any of its competitors.
“And its abundant cash flow allows the company to reinvest in the business as well as expand to new countries and new markets.
“And management just finished restructuring the company as a Real Estate Investment Trust (REIT) so that it can start returning the majority this cash to shareholders.
“As investment legend Gary Kaminsky pointed out … there are ‘very few companies that can grow and return capital to shareholders.'”
Well, they are a REIT — but they’re not returning all that much capital to shareholders … this is still, as you may well have guessed, the big cell-tower owner American Tower (AMT)
And yes, it’s expensive for a REIT — REITs are usually priced based on their dividend yield, and AMT’s yield is 1.2% (it’s growing, but still — that’s REALLY low). But they also keep handily beating earnings estimates, analysts think they’ll grow earnings by another 30-40% next year, so this is clearly, to at least a substantial degree, getting a nice and justified growth-stock valuation despite the fact that they’re a real estate investment trust and have promised to pay out substantially all of their earnings to shareholders. They don’t have all that much debt and they just made a substantial acquisition of some German cell towers, so apparently they have enough flexibility to keep investing in the business.
And cell towers are indeed very, very valuable — they’re hard to replace and, more importantly, most of them are far from being “full,” they can add more and more antennas and charge for each antenna, without having to invest any more in the tower or its basic infrastructure (power, etc.) With the big expansion of LTE coverage in the US, that’s been a major driver of AMT’s success — Verizon and AT&T and Sprint and all the others need to add new equipment to each tower to expand their LTE high-speed data coverage, so they have to pay those tower owners to add on their new antennas and whatever their other equipment is called. To give you an idea of how valuable these towers are, those German towers that AMT just bought came at an average price of a quarter of a million dollars each. That’s close to the number AMT uses when it estimates the cost to build a new tower ($225,000).
They provide value because it’s much cheaper for a carrier to lease a location from AMT than it is for them to shell out $225,000 themselves to build one, and AMT can get a decent return of ~4% by doing a “build to suit” tower for one customer … but that return jumps to ~20% when they get three clients onto one tower, so you can see how the business scales nicely. They do need to keep acquiring or building new towers pretty aggressively (at least a couple thousand a year) to keep growth at this rate, but even if they grow more slowly they’ll be abundantly profitable. Maybe not worth a $40 billion enterprise value, which they’re approaching now, but profitable and consistent.
So … yes, this REIT with significant growth expectations and a low payout is still David Gardner’s most-touted stock pick for his growth-focused Rule Breakers newsletter, and I still can’t convince myself to buy a REIT with a 1.2% yield … even if they do have 50,000+ super-valuable cell towers around the world (next biggest markets after the US are Mexico, Brazil, India and Colombia, and they have smaller positions in a half-dozen countries in Africa and South America … and now that good chunk of towers in Germany). They have a good investor presentation that lays out the economics and strategy of the company quite well, so you can check that out here if you’re interested.
Whether or not they get the growth that investors are expecting, with lots of new sites continuing to be added, there is at least a basic level of stability — they have essentially no leases expiring until about five years from now, and the land they’ve leased to build the towers is on even longer-term leases, so investors are clearly paying a premium price because they get that combination of stability and growth in one company … along with a dividend that, while small, will probably continue to grow pretty quickly (they’ve got the earnings coverage to pay out a substantially higher dividend).
I’ve personally been put off a bit by the valuation of AMT over the years, to my probably detriment, and I’ve continued to be more interested in the data center REITs, which have similar growth drivers (more data, more internet traffic, more cloud, etc.) but pay substantially higher dividends (3-5%) — and those stocks have, on average, done as well or better than AMT over the past couple years. If you want to take a look at those, the one I’ve suggested in the past has been CoreSite (COR), the big player is Digital Realty Trust (DLR), and the one that’s planning to convert to a REIT in a couple years is Equinix (EQIX), they came up in an article earlier this week. I don’t own AMT or any of those other names right now.
So what do you think? Ready for the continuing smart phone wars to keep padding the pockets of AMT owners? Or are you put off by the lowish yield? Other ideas in the “high tech” REIT space? Let us know with a comment below.