Crown Castle Stays Neutral

Crown Castle International Inc. (CCI - Analyst Report) reported robust financial results for the second quarter of 2012, beating the Zacks Consensus Estimates. The solid performance was mainly driven by higher usage of smartphones and tablets together with increased deployment of 4G/LTE networks.

To curtail customer churn, it has become essential for the carriers to boost network quality and coverage. Increased wireless coverage, by using more tower space, is one of the major initiatives that carriers take to improve transmission quality. Since moving equipments from one tower to another is cumbersome, carriers normally renew these contracts upon expiration, which implies that a high percentage of Crown Castle’s revenue is recurring. Top-line growth is mainly achieved by increasing occupancy levels at the existing towers, as well as through annual price hikes of approximately 3% - 5%.

Crown Castle has completed the acquisition of privately held NextG Networks Inc., which is the largest provider of outdoor Distributed Antenna Systems (DAS). At present, NextG has more than 7,000 DAS in operation coupled with another 1,500 nodes in the pipeline. The company also enjoys transmission rights over 4,600 miles of optic fiber cable. The proposed acquisition will enhance Crown Castle’s DAS network with more than 10,000 nodes spread across 26 U.S metropolitan cities.

On the flip side, highly leveraged balance sheet coupled with stiff competition from other tower companies will act as headwinds for Crown Castle going forward. Moreover, the company generates its revenue from top four carriers in the U.S. like AT&T (T - Analyst Report), Verizon Wireless, Sprint Nextel (S - Analyst Report), and T-Mobile. Therefore, loss of any carriers will heavily impair the company’s top-line growth. We, thus, maintain our long-term Neutral recommendation on Crown Castle.

Currently, CrownCastle holds a Zacks#2 Rank, implying a short-term Buy rating.