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Is it Wise to Retain SBA Communications (SBAC) Stock for Now?

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SBA Communications' (SBAC - Free Report) extensive and geographically diverse communication real estate portfolio is well-poised to benefit from the wireless carriers’ high capital spending for network expansion amid accelerated 4G and 5G network deployment efforts. Portfolio expansion moves backed by a solid balance sheet position augur well. However, notable customer concentration and high interest rates raise concerns.

What’s Aiding it?

The advancement in mobile technology, such as 4G and 5G networks, and the proliferation of bandwidth-intensive applications have driven the growth in mobile data usage globally.

This has resulted in wireless service providers and carriers expanding their networks and deploying additional equipment for existing networks to boost network coverage and capacity to meet the rising consumer demand, poising tower real estate investment trusts like SBA Communications well for growth.

The company has a resilient and stable site-leasing business model and generates most of its revenues from long-term (typically 5-10 year) tower leases that have built-in rent escalators. This assures steady revenues over the long term.

Moreover, with wireless service providers continuing to lease additional antenna space on the company’s towers amid the increase in network use, data transfer, network expansion and network coverage requirements, its site-leasing revenue growth is likely to remain robust in the upcoming period.

SBA Communications’ portfolio expansion efforts into select international markets with high growth characteristics position it well to take advantage of the secular trends in mobile data usage and wireless spending growth across the globe. In the third quarter of 2023, it acquired 45 communication sites for a total cash consideration of $40.8 million and built 86 towers.

Subsequent to Sep 30, 2023, SBAC purchased or is under contract to buy 215 communication sites for a total cash consideration of $74 million. It expects to conclude these buyouts by the end of the second quarter of 2024.

On the balance sheet front, SBA Communications exited the third quarter with $228.9 million in cash and cash equivalents, short-term restricted cash and short-term investments. As of Nov 2, 2023, it had only $285 million outstanding under its $1.5 billion revolving credit facility.  With ample financial flexibility, SBAC seems well-poised to capitalize on long-term growth opportunities.

Further, SBAC’s current cash flow growth is projected at 14.77% compared with 8.10% estimated for the industry.

Analysts seem bullish on this Zacks Rank #3 (Hold) company. The Zacks Consensus Estimate for SBAC’s 2023 funds from operations (FFO) per share indicates a favorable outlook for the company as it has been revised marginally upward in the past two months to $12.91.

The company’s shares have gained 10.4% in the quarter-to-date period compared with the industry’s growth of 3.4%.

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Image Source: Zacks Investment Research

What’s Hurting it?

The company has a high customer concentration, with T-Mobile (TMUS - Free Report) , AT&T (T - Free Report)   and Verizon (VZ - Free Report) accounting for the majority of its domestic site-leasing revenues. Notably, in the third quarter, T-Mobile, AT&T and Verizon accounted for 40.0%, 29.3% and 19.4%, respectively, of SBAC’s domestic site-leasing revenues.

Therefore, the loss of any of these customers, consolidation among them or a reduction in network spending might hurt the company’s top line significantly. Specifically, the churn arising from the Sprint-related decommissioning is likely to weigh on its performance in the near term.

SBA Communications has a substantially leveraged balance sheet with a high debt-to-capital ratio compared with the industry average. This limits its strength to withstand any credit crisis and unexpected negative externalities in the future.

Given the prevailing high interest rate environment, the company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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