American Towers: Banking on smartphone and iPhone fever

This great stock could boom this January when iPhone fever takes hold again. It is now official. Apple really is releasing an iPhone for Verizon. This means that half of the population in the United states (people with Verizon) will now be able to get an iPhone. That’s a huge amount of new people flooding the market, but the iPhone isn’t the only new smartphone that is catching people’s attention. About 20% of people with a smartphone have an Android phone, and don’t forget about the Blackberry which holds about 31% of the smartphone market. Over the past six months 32% of new smartphone owners chose an Android, 25% an iPhone, and 26% chose the Blackberry. In simpler words, a lot of people are making the switch to the smartphone, and with the addition of the Verizon iPhone to the market and the rising popularity of the Android, a lot more people will be making this switch. Don’t get me wrong though. After reading this article you shouldn’t go out and by a bunch of Verizon, Apple and Google stocks, because if you do that then your investment depends on the performance of that particular company and it’s products. Also these companies are already market superstars whose prices have skyrocketed.

Thousands of cellular towers like this one will be needed in the coming years all over the world.

Instead you could invest in this lesser known behind-the-scenes stock, American Towers (AMT). This company sets up cellular transmission sites, which are towers that cellphone carriers and broadcasters set up antennas and other equipment on. The companies pay them to be able to use their towers for their equipment. Their equipment is used to transmit spectrum (radio waves). Spectrum is what you use to make a call on your cellphone, but now that there will be a continued increase in smartphones, a lot more spectrum is needed. Suddenly you can look up stuff on the internet, check you email, watch videos, and a bunch of other things on your phone. This puts a lot more strain on the cell phone networks because it requires a lot more spectrum to stream huge amounts of data. On top of it 4G has recently been released and the CEO of TowerCo L.L.C, Richard Bryne said, “4G demand is going to be beyond anyone’s expectation.”  All the cell-phone carriers are spending huge amounts of money on expanding and upgrading their networks. All that spending is going to increasing the amount of antennas and they need towers to put the antennas on. Some predictions say that 2.4 million cell sites will be deployed over the next 10 years. American Towers provides the infrastructure needed to place those antennas, and American Towers is the biggest and leading cellphone transmission site company in the U.S. They currently have about 32,000 of these towers, about 22,000 of which are for cellphones.

Not only are they the biggest of these companies, but they are also the most efficient, because they lease as much space on their towers as possible allowing them to make a very high profit. Because of strict regulations, it is difficult to build new towers: most growth is driven by adding tenants to existing towers, and they are the masters of this art. They have the highest ratio tenants per tower, which sets them apart from other companies in their business. This high efficiency makes them the most profitable in the industry.  Their operating margin (also referred to as EBIT margin) is a high 40.2%, which is the money they’re left with after paying employee wages, upkeep, cost of goods, and all other cost except for interest on debt and taxes. Before paying taxes and interest on debt they make $40.20 for every $100. That is pretty high for an asset-heavy company that actually owns real stuff. It’s also has the highest in its industry, and much higher than the industry average, which is 4.4%. Additionally the difficulty of building new towers makes it very hard for new companies to form and compete, and for smaller companies to grow, so American Towers doesn’t have to worry much about competition, or losing it’s leadership of the industry.

It has a very high cash flow: it made a whopping $620 million in free cash flow in the last 12 months. That is almost double that of it’s closest competitor. This high free cash flow allows the company to reinvest in its business and expand to new places in the U.S. and around the world. It currently has about 8,000 towers in Brazil, Mexico, South Africa and India. In India, although many struggle to get enough food, water and other bare necessities, cellphones are everywhere. India is the second largest telecommunication network in the world in terms of number of wireless connections after China. About 550 million people already have cellphones, and an impressive half a million are getting cellphones PER DAY! It’s predicted that in the next couple of years 150,000 new cellular transmission sites will be needed in India. Additionally Apple is discussing releasing the iPhone there with the two major carriers Reliance Communications and Tata Teleservices. India is a huge emerging market and American Towers is well positioned in India to help supply towers so that spectrum can be provided for the use of cellphones.

American Towers is led by the CEO James D. Taiclet Jr. who was named one of the “Top 100 best-performing CEOs in the World” by the Harvard Business Review. He recently said on CNBC’s Fast Money “dividends will be paid in the next two to three years.” That way some of their massive cash reserves can be returned to their shareholders.

To Summarize

  • With the release of Verizon iPhone in January and the growing popularity of all smartphones such as the Android and Blackberry, as well as the newly available 4G connection, a lot more spectrum and therefore cellular transmission sites will be needed
  • American Towers is the leader in their industry and have the highest operating margin
  • Have a huge cash flow
  • Is well managed by a CEO who was named one of the top 100 CEOs in the world. He runs company in stock-holder friendly ways and says dividends might be paid out in coming years
  • Well positioned in growing economies all over the world
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5 Responses to American Towers: Banking on smartphone and iPhone fever

  1. Very Nice website. I recently built mine and i was looking for some design ideas and you gave me a few. The website was developed by you?

    Thanks

  2. Sue says:

    Do you know if steel and/or titanium will be used in the future to build these towers? Would a stock in one of these companies be a good idea too? I like your writing style. Thanks!

    • qdupouy says:

      I believe that they are currently built with steel, but even if they were to switch to another kind of metal, it would have an extremely small affect on the titanium companies. The number of towers built and the amount of metal needed wouldn’t be large enough to have any noticable effect on those mining companies, so while investing in a titanium or steel company could be a very good idea right now, the reason to do it should not be a pick up in the number of cell phone towers being constructed.

  3. gettrich says:

    This post is several years old I believe. Are you still recommending AMT?

    • qdupouy says:

      Yes this post is a little over a year old, but I would definitely still reccomend buying it; I still am holding on to it. It is now structured as a REIT (meaning it will pay out 90% of it’s earnings to shareholders) which is great for anyone who owns it. I strongly reccomend getting on a Dividend Reinvestment Plan (DRIP) which is something that many brokers, discount brokers too, offer for free. In case you don’t know what it is it’s a plan where any dividend you get is automatically reinvested into the stock meaning your ownership of the company will grow, and the amount your paid in dividends will grow exponentially over time. In my article I said that they should be paying dividends soon, and that moment has come which shows that they are a stable, and profitable business. Additionally, it doesn’t seem that the business of supplying towers to transmit cellphone signals is going down, if anything it has gone up since then. I still would definitely say this a solid stock, which you should seriously consider purchasing.

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