“One Stock You Must Buy Before the iPhone-Android War Escalates Any Further…”

The Fool's "Samsung and Apple Can Fight All They Want" Pick

By Travis Johnson, Stock Gumshoe, November 15, 2012

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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.


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23 Comments on "“One Stock You Must Buy Before the iPhone-Android War Escalates Any Further…”"

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emulwa
Member
0
emulwa
November 15, 2012 2:13 pm

Gumshoe…I just received this teaser for Motley Fool…”One Stock You Must Buy
Before the iPhone-Android War Escalates Any Further…”

Do you happen to know what company it is?

David (archivesDave) Clumpner
Guest
0
David (archivesDave) Clumpner
November 15, 2012 9:51 pm

Thnx Gummie….Exc article!!!

Jon Rawlins
Guest
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Jon Rawlins
November 15, 2012 10:21 pm

AMT….Is the a bogus “penny stock like” pump and dump?

Gary W
Guest
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Gary W
November 15, 2012 11:03 pm

COR is down 40% in the last month, DLR is down 35% in the last 4 months, but AMT has climbed slowly but steadily for 2 years. Looks like they’re doing something right. Since LTE is not even close to being built out, AMT should do well for a while.

hommie
Member
1
hommie
November 16, 2012 12:35 am

What made COR drop? Third Qtr results look good?

hommie
Member
1
hommie
November 16, 2012 12:39 am

Maybe a P/E of 150 and market drop since election?

ohya
Member
0
ohya
November 16, 2012 6:06 am

I am very interested in REIT’s,but AMT has never caught my eye.I also look towards precious
metals like silver which will out-perform gold in the long run.

Ron Homan
Guest
0
Ron Homan
November 16, 2012 1:25 pm

11 years ago I bought a competitor of theirs, SBAC (SBA Communications). While they have never paid a dividend, they are up 3206% since then. They have never made a profit but have enormous depreciation charges which they use to buy or build more cell towers. Hopefully one day they will start to return some of the cash to the stockholders. In the meantime S&P projects a 20% rise in price over the next year so I guess I will hold on and keep waiting for it.

Cathy
Guest
0
November 16, 2012 5:33 pm
Gumshoe just got my casts cut off Monday for the first time in 11 weeks I have had them put on and cut off repeatedly before that i had about 3 weeks like that on and off because they where putting a zinc and some other mesh to stop blisters and cuts out of know where I would wake up and be Bleeding like a pig and end up in the hospital for a week each time , I broke my neck 5 years ago and got a St Judes implant that really helped with pain but they thought it… Read more »
Sam
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0
Sam
November 17, 2012 12:37 am
I’m afraid I can’t agree with you completely that the towers have lots of room on them and that they can just add more equipment on them. Many of the towers are already loaded quite heavily. They have the older technology on them that are still in use plus they are adding the new UMTS and LTE technology as well. This newer technology is MUCH heavier then the older generation and so in order to add them on to the tower, the tower must be “beefed up” . This costs thousands per tower, you could be looking at foundation work… Read more »
aterosin
Member
6
aterosin
November 17, 2012 9:11 am

I bought American Tower last March and it is up 17%. Wish I had bought more at the time….

Luther
Guest
0
Luther
May 18, 2013 9:27 pm

Please note, primary load for towers is not weight. NOT. Primary load is lateral wind loading, so it scales with cross-section of antennas and lines, not with the weight. Note also, higher elevations are much more expensive than lower elevations. Higher sees more wind, and moment arm increases with the square of the distance from the ground. Peak winds and icing potential drive the wind resistance calcs, and control the costs.

Also, I see no mention of AMT as a big player in Africa Telecom.

pmredmonton
Member
0
pmredmonton
November 17, 2012 4:42 pm
I just wonder how much ALU’s new product – the light cube radio will cut into AMTs growth. The towers work great in open space as they can potentially transmit very long distances in open space. However, they face major limitations in crowded cities where their penetration is much lower. The new product that ALU has rolled it is a small cube that can be attached on top of street poles. It can then transmit data very fast over short distances. But if you put up enough of them you can cover a large area with wifi that can handle… Read more »
krohr1
Member
0
krohr1
October 11, 2013 11:20 pm

Well, you may be on to something. Your post last year was when ALU was at $1.00…a year later it is closing in on $4.00. I bought at $2.11 in Feb 2012 and watched it crash down to $.94 just to make a comeback over the last year. It had a bumpy ride this week, but I’m still a believer in its technology…it’s just going to take a while for the markets to believe it.
We shall see.

who noze
Guest
0
November 18, 2012 7:54 am

sprint has the contact for the east coast only because, sprint has been a major suppoter of alu jst hope they strat making money before bankruptcy

Don
Guest
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Don
November 19, 2012 3:54 pm

The small cell technology could indeed render some (if not all) of these ugly towers obsolete before you know it . The small cells can be deployed on telephone poles or simply on the walls of buildings. Once that technology is found to work equally well (or better), you may find that voters start asking to take down these eyesores aka cell towers in their neighborhood. That’s why the Germans sell their towers to AMT, while they still can get good money for them. They are not stupid.

Beth
Guest
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Beth
November 27, 2012 1:03 pm

I bought this stock when I first saw MF touting it, and it has grown 50%. Imagine my excitement when I tracked down this latest MF teaser and found I already owned it!

Ian Shearer
Guest
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Ian Shearer
March 1, 2013 3:52 pm

Before you sink serious money into Tower companies, you might like to know why the Germans sold so many towers to AMT. After all – if they were a good revenue stream why would you sell them for $250k when they cost about $225k to build, The answer is they soon won’t be needed.
Go to http://www.avanti.com to see why.

Mike Steinback
Guest
0
Mike Steinback
March 2, 2013 3:19 pm

Ian, can you summaries your thoughts on Avanti and how to play it? I looked at the website, but didn’t grasps the answer you implied above.

wpDiscuz