On Dec 5, 2013, we downgraded our recommendation on American Tower Corp. (AMT - Analyst Report) to Underperform from Neutral due to its subdued performance during the third quarter of 2013.
Why the Downgrade?
Despite increased deployment of 3G/4G network by carriers across the world and aggressive buyouts of towers in emerging markets, the company is exposed to stiff competition and new technologies. Moreover, foreign exchange rate risk, less customer concentration, integration risk, rising operating expenses, regulatory concerns and a highly leveraged balance sheet may act as headwinds for the company, going forward. Nevertheless, the stock is trading at a 52-week high and is fairly valued at the current levels.
Currently, American Tower has a Zacks Rank #3 (Hold).
American Tower has a substantially leveraged balance sheet. At the end of the third quarter of 2013, the company had nearly $12.6 billion of net debt (total debt-cash & cash equivalents) and a debt-to-capitalization ratio of 0.77. A very high level of indebtedness makes it difficult for the company to generate sufficient cash to meet its debt obligations in the future. This may also hinder the company’s effort to access the debt market to borrow and refinance at favorable rates. Moreover, Moody’s rating agency has lowered the company’s rating outlook to negative from stable while maintaining Baa3 ratings on its senior unsecured debts.
Customer concentration is very high for American Tower and the top four customers accounted for nearly 60% of its quarterly revenues. The loss of any of these customers or consolidation among these wireless carriers will have a significant impact on the company’s top line.
American Tower is highly exposed to foreign exchange rate risks. As the company continues to expand its network in emerging nations like India, China and the Latin American region, it will remain highly vulnerable to exchange rate risks. Moreover, the current deteriorating economy will further devalue the emerging nations’ currencies.
Other stocks that are worth mentioning within the same sector are The GEO Group, Inc. (GEO - Snapshot Report), Getty Realty Corp. (GTY - Snapshot Report) and National Health Investors Inc. (NHI - Snapshot Report). All the three stocks currently sport a Zacks Rank #1 (Strong Buy).