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Still Neutral on American Tower

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On Aug 29, we maintained our Neutral recommendation on American Tower Corp. (AMT - Free Report) . The company reported tepid second-quarter 2013 results with both the top and the bottom lines missing the Zacks Consensus Estimate.

Why Reiterated at Neutral?

Higher adoption of smartphones/tablets coupled with increased deployment of 3G/4G networks by the carriers across the world will continue to drive the demand for tower space, going forward. American Tower is rapidly expanding its business operations in various emerging markets. In addition to Brazil and Mexico, American Tower has taken a major initiative to expand its operations in India. The company is already on the verge of acquiring 8,000 wireless towers of Tower Vision, a privately held Indian wireless tower operator. This will generate long-run sustainable business for the company. Moreover, the company also planned to acquire 2,790 Brazilian towers and 1,666 Mexican towers from NII Holdings for $413 million and $398 million, respectively.

Moreover, the company has started offering cost-effective outdoor Distributed Antenna Systems (DAS) to its customers.  Management indicated that DAS has the potential to reach 2.0% of American Tower’s total revenue over a period of three to five years.

On the downside, American Tower has a substantially leveraged balance sheet. At the end of the second quarter of 2013, the company had nearly $8.79 billion of net debt (total debt-cash & cash equivalents) and the debt-to-capitalization ratio was 0.71. High level of indebtedness increases the possibility of a company failing to generate sufficient amount of 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.

Furthermore, higher customer concentration for American Tower coupled with huge exposure to foreign exchange rate risks will act as headwinds for the company, going forward.

Currently, American Tower has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other stocks in the wireless tower industry include Crown Castle International Corp. (CCI - Free Report) , SBA Communication Corp. (SBAC - Free Report) and Douglas Emmett Inc. (DEI - Free Report) . Currently, both Crown Castle and SBA Communication have a Zacks Rank #3 (Hold) while Douglas Emmett has a Zacks Rank #2 (Buy).

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