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American Tower (AMT) on Growth Trajectory: Care to Invest

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U.S. wireless tower operators had a dream run in 2017. American Tower Corp. (AMT - Free Report) was certainly one of the major beneficiaries. We believe there are a number of reasons for this stellar show to continue in 2018. We will discuss the reasons in short.

Upcoming 5G Wireless Network

Fifth-generation (5G) superfast wireless networks will provide the primary impetus to the telecom industry. In September 2017, Moody's Investors Service stated in a report that the evolution towards 5G wireless networks will result in higher capital spending for U.S. wireless carriers. In this context, Internet-of-Things (IoT) holds the potential of becoming the numero uno factor in driving growth in the space. Upcoming 5G mobile networks will be of utmost importance in the management of exponential growth in IoT.

Strong Business Model

Wireless services are advancing fast in terms of additional features and capabilities. Much of the infrastructure and upgrades require effective site management of cell towers and equipment. Tower operators effectively address this opportunity as more than 90% of its quarterly revenues come from wireless carriers. Tower operators generally have long-term (typically 5 -10 years) tower lease agreements with the U.S. national carriers.

Moreover, wireless consumer demand is expected to increase considerably over the next several years, driven by increased innovation and adoption of data-driven mobile devices and applications such as machine-to-machine (M2M) connections, social networking and streaming of video.

Importantly, American Tower has a highly diversified business model. Apart from its leadership position in the United States, the company has a strong foothold in Asia (especially in India), Latin America, Europe and the Middle East. In 2016, American Tower generated 41% of its total revenues from outside homeland. Management expects international revenues to top U.S. sales in next three to seven years.

American Tower is highly enthusiastic about its India operation where the company already controls over 58,000 towers. In November, 2017, American Tower entered into an agreement to buy about 20,000 towers from Vodafone Group Plc’s Indian business and Idea Cellular Ltd., for approximately $1.2 billion. The tenancy ratio is expected to rise to 2.9 times by March 2020, from about the 1.95 times average for India in 2015.

Massive Spectrum Deployment by U.S. Carriers

Wireless networks will be integral to the future growth of the overall telecom industry. T-Mobile US Inc. (TMUS - Free Report) has aggressively started deploying 600 MHz low-band airwaves. This year, AT&T Inc. (T - Free Report) will deploy 60 MHz of fallow spectrum and 600 MHz low-band spectrum coupled with its ongoing network densification project.

Moreover, AT&T will also install its FirstNet project to build and manage the first nationwide broadband network dedicated to America's police, firefighters and emergency medical services. As part of the 25-year contract, FirstNet will provide AT&T with a swath of 20 MHz of spectrum in the 700 MHz frequency band for the entire duration. The company is expected to spend around $40 billion over the life of the contract to build, deploy, operate and maintain the network.

The market for U.S. public safety network for first responders and civil protection services is becoming intensely competitive. In August 2017, Verizon Communications Inc. (VZ - Free Report) announced plans of dedicating network capacity to emergency services providers. The company will make Band 14 devices available and ensure full interoperability with any Band 14 radio access networks (RANs) deployed by FirstNet. Band 14 is the 700MHz LTE band allocated for the public-safety network.

Additionally, major U.S. telecom operators are exploring ways to commercialize usage of 3.5 GHz unlicensed wireless spectrum. Notably, the 3.5 GHz radio frequency is being considered in many parts of the world for the upcoming 5G wireless standard, thus increasing its chances of providing spectrum globally.

Entry of New Players in the U.S. Wireless Space

The U.S. wireless industry is likely to get competitive in 2018 with the entry of cable MSOs (multi service operators) in this space. Comcast Corp. (CMCSA - Free Report) has already entered this field with its Xfinity Mobile offering. At present the company is using its MVNO (mobile virtual network operator) agreement with Verizon to use the latter’s wireless network coupled with its own WiFi network to offer mobile services. Importantly, the company acquired 73 licenses in the band of 600 MHz auctioned by the FCC. We believe that in the future Comcast will deploy this spectrum for extensive wireless coverage.

Charter Communications Inc. (CHTR - Free Report) has reiterated its plans of launching wireless service in the first half of next year. Similar to Comcast, the company also has an MVNO agreement with Verizon as well as its own WiFi network to offer mobile services. It has also launched experimental field trials of the 5G wireless network.

DISH Network Corp. (DISH - Free Report) has created an extensive portfolio of spectrum, the most important component of wireless networks. The company boasts a portfolio of 80 MHz of radio frequencies of different bands, which will be utilized in deploying 4G LTE wireless network in top 100 U.S. markets. DISH Network’s CEO Charlie Ergen has hinted that the company is interested in the potential deal-making to enter the wireless industry. At the same time, Ergen also stated that DISH Network has plans of building a wireless network on its own.

Strong Fundamentals

American Tower has strong fundamentals. Our analysis has been substantiated by the fact that over the past 60 days, six analysts have upwardly revised their estimates for American Tower’s 2018 earnings per share (EPS). As a result, the consensus estimate for 2018 EPS has gone up from $7.61 to $7.64, reflecting year-over-year growth of 12.78%.

Likewise, the Zacks Consensus Estimate for revenues for 2018 currently stands at $7.21 billion, reflecting year-over-year increase of 8.42%. American Tower has long-term (three-five years) EPS growth estimate of 13.02% and a dividend yield of 1.96%.

Price performance and Zacks Rank  

In 2017, American Tower’s shares have gained a substantial 32.72% compared with the industry’s growth of a mere 3.35% and the benchmark S&P 500 index growth of 18.25%. American Tower carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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