American Tower (NYSE: AMT)

What we love about American Tower

  • Strong Fundamentals

  • Strong Barriers to Competition

  • High Switching Costs

  • Ability to capitalize on the continued transition to 5G and continued proliferation of cell service in emerging markets

Risks

  • Partially funding the business through debt financing

  • High valuations due to 5g ‘hype’ → susceptible to correction


Full Report:


American Tower (NYSE: AMT) is one of the largest real estate investment trusts (REITs) in the world that specializes in communications real estate. Essentially, AMT buys or builds towers, and then rents out space on the towers for companies like Verizon and T-Moble to mount their communication equipment. At People’s Capital, we believe American Tower is a fundamentally sound company with infrastructure that is difficult to replicate, essential to the increasingly connected world we live in, and favorably positioned to benefit from technological trends.


AMT’s revenue and earnings both grow somewhat consistently with 8% and 17% respective average growth rates. More importantly, earnings are always positive, which means American Tower is a consistently profitable company despite a global pandemic that shook many businesses to their core in 2020. On the cash flow statement, cash from operations grows at an average of 9% a year, while cash from investing is increasingly negative - an indication that the business is still expanding into new markets. Overall, AMT’s financials should assure investors that American Tower is a profitable and stable company.


American Tower also resides in an industry that is extremely hostile to new entrants. Restrictive zoning and permits make it incredibly difficult to build new towers in the U.S., so companies like AMT that have established networks of towers can charge higher prices without fear of being undercut by new startups. Furthermore, even in locations where zoning and permitting permit the construction of new towers, local residents often oppose such projects due to their unsightly nature.


AMT also receives pricing power from the incredibly high switching costs its customers face. It is estimated that if a company like Verizon wanted to remove its equipment from an AMT tower and install it on a neighboring tower, it would cost ~20x as much as its monthly rent at AMT. In short, this means that communications companies do not want to change tower companies because it is expensive, so AMT receives additional leverage to increase its prices.


The evolution of communication technology is also advantageous to tower companies like AMT. As demand for faster wireless data transfers increases, the wavelength of the electromagnetic radiation that carries wireless data must be reduced to handle the extra data. However, the reduced wavelength also reduces how much the signal can diffract, or bend, around corners or geographic features. In short, the more data a signal carries, the shorter the distance it can travel. Thus, the demand for cell tower real estate will continue to increase, which makes companies like AMT more valuable.


There are some risks associated with an investment in AMT. First, AMT has funded some of its recent expansion with debt financing. This is not an immediate cause for concern - interest rates have been low in recent years, so it has been an attractive option for many businesses that are looking for extra funds to grow. Additionally, debt is a common portion of real estate financing. However, AMT’s debt levels should be closely examined by an investor before putting capital into the business. Secondly, due to the ‘hype’ around companies related to 5G, tower stocks like AMT have high valuations at the moment. These high valuations make AMT susceptible to a market correction.


After weighing the benefits and risks of an investment in AMT, we at People’s Capital believe American Tower is a strong investment on a 3-5 year horizon.



Best,


The People’s Capital Team



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