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Can Crown Castle's Diversification Efforts Battle Headwinds?

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Crown Castle International Corporation (CCI - Free Report) has been making concerted efforts to reposition itself from a tower company to a fiber provider, focusing on the small cell opportunity, backed by fiber operator acquisitions. Amid the ever-changing developments in new technology that could reduce demand for site leases and inflate expenses, such business diversification augurs well for long-term profitability.  

The company has been making strategic buyouts to fortify its position as one of the largest fiber network operators in the United States. Its acquisition of LTS Group Holdings LLC in November 2017 enabled the company to gain around 32,000 route miles of fiber located mainly in top metro markets in the Northeast, including Boston, New York and Philadelphia. Further, such strategic deals offer higher opportunities for small-cell network deployments in these markets.

Moreover, deployment of 5G aid wireless carriers to expand and improve their networks by providing coverage, capacity and speed which is needed to support mobile video, Internet of Things (IoT) and fixed wireless broadband. This, in turn, is anticipated to fuel revenues for Crown Castle’s tower and small cell assets.

Additionally, a hike in the 2018 outlook by management in Q1 instills confidence in the company. The raised outlook primarily reflects the expected impact of the recently-signed customer agreements. Specifically, the company expects site-rental revenues of $4,639-$4,684 million, denoting a projected increase of $57 million at the mid-point from the previously issued outlook. Adjusted EBITDA is anticipated in the band of $3,097-$3,142 million, reflecting an uptick of $48 million at the mid-point. In addition, AFFO is guided in the band of $2,255-$2,300 million, marking a rise of $36 million at the mid-point.

Shares of this Zacks Rank #3 (Hold) company have outperformed the industry it belongs to in the past year. Crown Castle has gained 5.1%, while the industry has declined 2.2%. Also, the Zacks Consensus Estimate for 2018 FFO per share has remained unchanged in a month’s time.

However, further advancement of technology is expected to reduce demand for site leases. In fact, recent developments in satellite-delivered radio and video services will likely reduce need for tower-based broadcast transmission, while changes in demand for network services might expose Crown Castle’s revenues to volatility. Moreover, as mobile handset manufacturers and wireless carriers increasingly adopt the Voice over WiFi network technology, its revenues are feared to be impacted.

In addition to the above, high customer concentration remains a headwind. While the company’s top four customers — Verizon Wireless, AT&T, Sprint, and T-Mobile — account for majority of its total revenue, AT&T contributes a handful of site rental revenues. Hence, loss of any of these customers or consolidation among them will significantly impact the company’s top line.

Stocks Worth a Look

A few better-ranked stocks from the same space include Arbor Realty Trust (ABR - Free Report) , Columbia Property Trust, Inc. (CXP - Free Report) and Extra Space Storage (EXR - Free Report) . All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arbor Realty Trust’s Zacks Consensus Estimate for 2018 FFO per share remained unchanged at $1.03 over the past month. Its shares have returned 15.9% in the past three months.

Columbia Property Trust’s FFO per share estimates for 2018 remained unchanged at $1.46 in the past month. The stock has gained 10.1% during the past three months.

Extra Space Storage’s Zacks Consensus Estimate for 2018 FFO per share remained unchanged at $4.62 over the past month. Its shares have returned 15.6% in three months’ time.

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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