On Oct 12, leading international wireless tower operator American Tower Corp. (AMT - Analyst Report) was downgraded by a notch to a Zacks Rank #3 (Hold). The downgrade was a result of rising operating expenses and a highly leveraged balance sheet along with adverse foreign currency exchange rate, stiff competition and integration risks.
American Tower reported a substantially leveraged balance sheet in the last quarterly report of 2Q16, wherein the company had $410.5 million in cash and cash equivalents and around $18,717.1 million of outstanding debt, compared with the 2015-end levels of $320.7 million and $17,068.8 million, respectively. Meanwhile, the debt-to-capitalization ratio was 0.73 versus 0.72 at the end of 2015. Such high debt levels may impede sufficient cash flow generation, which is needed to meet future debt obligations. Moreover, this may keep the company from accessing the debt market and refinancing at suitable rates.
Moreover, the customer concentration is very high for American Tower. The loss of any customers or consolidation among them will have a significant material impact on the company’s top line. Moreover, the ongoing consolidation trend among telecom and cable TV operators may generate significant financial fluctuations for the company.
Although the company’s expansion in international markets, especially in the emerging Asian and Latin American markets, bode well, it may dent the bottom line. This is because tower operations in the emerging markets are not as profitable as that in the mature U.S. market. Expansion in the international markets also leads to foreign currency exchange rate risks.
American tower is poised to benefit from the increased investment by wireless carriers as they forge ahead with the deployment of 5G network. Moreover, American Tower has been focusing on its operations in India which include the acquisition of a 51% stake in Viom Networks and the tower deal with Bharti Airtel’s Tanzania unit. These transactions will increase the tower count as well as help the company build stronger ties with mobile network operators such as Bharti Airtel, Vodafone, Idea, Tata, Reliance and Aircel. Going forward, we believe that American Tower’s tower buyouts in emerging markets should help drive its top line and lend it a competitive edge over rivals. American Tower’s Indian, EMEA and Latin American operations account for almost 50% of its organic core revenue growth.
Stocks to Consider
Better-ranked telecommunication stocks are NTT DOCOMO, Inc. (DCM - Snapshot Report) , Nippon Telegraph and Telephone Corporation (NTT - Snapshot Report) and BlackBerry Limited (BBRY - Analyst Report) , all sporting a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
The current year earnings estimates for NTT DOCOMO, Nippon Telegraph and Telephone Corporation and BlackBerry have improved 7.27%, 7.02% and 70.37% over the last 60 days.
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