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Ticker:

Sector:
Industry:

AMT
Telecommunications
Diversified
Communication
Services

Recommendation: DONT BUY


Pricing
Closing Price
52-wk High
52-wk Low

$44.19 (7-18-10)
$47.21 (7-8-10)
$30.85 (9-2-09)

American Tower
Corporation (AMT)
Recommendation

Market Data
Market Cap
Total assets
Trading vol.

$18.4B
$8.5B
3.4M

Valuation
EPS (ttm)
P/E (ttm)
PEG
Div Yield

$0.70
66.20
2.3
-

Profitability & Effectiveness (ttm)


ROA
3.34%
ROE
8.70%
Profit Margin
16.06%
Oper Margin
39.60%
Gross Margin 75.98%

While American Tower Corporation is the


industry leader in a rapidly growing industry, which is
evident from AMTs five-year revenue growth of 19.53
percent, AMT is not undervalued at this time. The
wireless tower industry will continue to expand over the
next decade because of a push for more towers to
accommodate the move to smartphones and
international growth in emerging markets. AMT is
positioned to capture much of this expansion because
of superior operating management, the strongest
financial statements in the industry, and the most
geographic diversification. Still, the DCF model provided
an intrinsic value of $23.72 when using a ten-year beta
and $31.38 when using a more appropriate for the
company seven-year beta. Many analysts recommend a
Buy rating for AMT with the consensus fair value at
$49.91. Since AMT traded at $44.19 as of 7-18-10, it
does not appear significantly undervalued even by
analysts at the time.

ANALYST NAME
David Thiessen
datvdb@mail.missouri.edu

Company Profile
American Radio System Corporations created
American Tower Corporation in 1995 as a subsidiary and
AMT became a freestanding company in 1998. AMT is
one of the leading wireless and broadcast
communication companies and it develops, owns, and
operates communication sites. These include wireless

towers, broadcast towers, and distributed antenna system networks. As of the end of
the fiscal year 2009, AMT had approximately 19,800 towers in the U.S. and 7,000 more
towers in Brazil, Mexico, and India. Most of AMTs business comes from leasing antenna
space on the towers to wireless communication companies and radio and television
broadcast companies. These wireless communication companies include AT&T, Sprint,
and Verizon. AMT chooses to focus on the leasing of antenna space compared to the
network development services because of higher operating leverage and low cash flow
volatility. The rental and management segment had an operating margin of 72.7 percent
in 2009 compared to 31.4 percent for network development. This focus has allowed
AMT to realize greater margins compared to its competitors. Also, AMT operates mostly
in the U.S. with 85 percent of revenue coming from the country but is focusing on
expanding geographically, mainly to Brazil and India. Since AMTs main business comes
from leasing of space, it plans on converting to a REIT sometime around 2012 when it
has no more Net Operating Losses (NOLs). This should help AMT from a tax standpoint.

Operating Segments
Rental and Management
This segment accounted for 97 percent of revenue in 2009. Within this segment
are four sub-segments: wireless communication towers, broadcast communication
towers, DAS networks, and rooftop management.
Wireless communication towers refer to the leasing of space on towers to
wireless communication companies. In 2009, wireless communication towers accounted
for 94 percent of total revenue. As of 2009, AMT had 19,800 towers in the U.S., 2,600
towers in Mexico, 1,600 towers in Brazil, and 2,600 towers in India. Customers to these
towers include: AT&T, Verizon, Sprint, America Movil, Nextel, Vodafone, and Telefonica
to name a few. Of these customers, AT&T, Verizon, and Sprint accounted for
approximately 19 percent, 18 percent, and 15 percent of total revenue. Leases are
usually initially non-cancelable for five to ten years and then tenants have the option to
lease for five-year renewal terms. Also, lease payments automatically increase three to
five percent per year to cover costs from inflation. As of December 2009, AMT had
average tower occupancy of 2.4 tenants and each tower can hold up to four tenants.
AMT also owns 230 broadcast towers in the U.S. and 200 in Mexico. These
towers, which are taller, more complex, and more expensive, are leased to radio and
television broadcast companies. In 2009 this segment accounted for six percent of
revenue. DAS networks are smaller wireless networks for malls, casinos, and other
buildings. AMT has approximately 200 DAS networks and they account for one percent
of revenue. Finally, AMT also operates and leases rooftop antennas in places where this
technology is feasible. This only accounts for approximately one percent of revenue.

Network Development Services


AMT offers services such as site acquisition, zoning and permitting services, and
structural analysis services through this segment. In 2009 it accounted for only three
percent of revenue and is not a main focus for AMT.

Wireless Growth Potential


Much of the excitement for the telecommunications industry comes from the
strong wireless communication growth potential, particularly overseas and in data
plans. Currently the U.S. has a wireless penetration of 89 percent, which measures the
number of subscribers as a percentage of total population. Keep in mind that Argentina
has a wireless penetration of 115 percent, so the U.S. will likely go over 100 percent in
the future. Still, the growth of subscribers is slowing down in the U.S.
AMT sees growth potential in smartphones, data plans, and emerging markets.
As of December 2009, there were 120,000 towers in the U.S. with AMT operating 19,600
of them. The largest operator, Crown Castle International Operations, had 22,000 sites.
While AMT is expanding its number of U.S. towers, it focuses more on maximizing
profits from each tower. AMT estimates that the U.S. has a smartphone penetration of
30 percent and thinks this could double by 2013. This is significant because data plans
accounted for $33 billion of the $39.1 billion increase in revenue for wireless companies
from 2005 to 2009.

Much of the growth in telecom will come from emerging markets, namely India.
As of June 2009, India had 427.3 million subscribers and this is expected to grow to near
737 million by 2012. Also, because of cheap mobile call tariffs, many Indian mobile
companies are seeing margins decrease, which has led to more tower sharing and
leasing. This benefits the tower companies because towers have fixed costs and most of
the rent from each additional tenant goes through to operating profit. Also, AMT
purchased Indias Essar Telecom Infrastructure Pvt. Ltd. for $432 million in cash in
February 2010, which brought AMTs number of towers in India to nearly 7,000 and
made it the second largest independent tower company in India. The deal should
increase AMTs foreign revenue from 15 to 21 percent. The largest independent tower
company in India, GTL Infrastructure, recently beat AMT in a bid for 50,000 towers from
Reliance Communication. GTL now has 80,000 towers in India. AMTs largest U.S.
competitor, CCI, does not currently own any towers in India but is exploring options.
Finally, AMT purchased 287 towers in Chile during Q2 of 2010.

SWOT Analysis
Strengths
Better operation management
o Tower companies operate in similar fashions but AMTs operating margin
of 39.6 percent is ahead of CCIs 27.1 percent and SBA Communications
Corporations 10.1 percent. Not only does AMT have higher revenue in its
rental business segment than its competitors, it spends less
comparatively. For example, rental site operating costs for AMT in 2009
were 23 percent of rental site revenue, while for CCI they were 29.6
percent. Analysts attribute this to better tower selection and an emphasis
on added tower tenants as opposed to simply adding towers, which have
high fixed costs. The revenue from each new tenant flows mostly to
operating profits since they do not bring much added costs. Also, AMT
focuses more on its rental business, which has higher margins than
network services, than either competitor.
Geographic diversification
o AMT has the second most towers in the U.S. but has a stronger
international presence than any of its competitors, which is important as
the wireless growth in U.S. slows down but is still strong elsewhere. In
particular, AMT has begun to expand to India ahead of both CCI and
SBAC. AMTs strongest competitor, CCI, only has towers outside of the
U.S. in Canada and Australia, two places that have strong wireless
penetration and do not show as much growth potential as emerging
markets. By moving into Chile, India, Mexico, and Brazil ahead of its
competition, AMT is better protected from any slowdowns in the U.S.
and is better positioned to capture growing revenues in these emerging
markets.
Financial stability
o The independent wireless tower companies are all relatively young,
coming into existence in the 1990s, meaning they are still finding their
footing financially. Of the three main U.S. independent tower companies,
AMT is the most financially stable. Back in 2002 this was not the case,
with AMT losing over $1 billion and nearly going out of business. Since
then, AMT has divested some non-core business lines and is the only one
of the three to turn a profit. CCI had a loss of $114 million in 2009 and
SBAC had a loss of $140 million. AMT also operates with significantly
lower leverage, giving it better financial flexibility.
Weaknesses
Few customers

o The four main wireless carriers in the U.S. (AT&T, Verizon, Sprint, TMobile) account for 61 percent of AMTs revenue. This means that the
customers have power over AMT in negotiations. If AMT were to lose any
of these four customers, it would substantially hurt AMTs revenue.
Further, any consolidation among these companies would likely lead to a
reduction of leases because of redundancy from overlap. Also, five
percent of revenue came from Grupo Iusacell, which operates Iusacell
Celular and Unefon in Mexico. This makes AMT susceptible to currency
shocks.
No product differentiation
o There is no real differentiation among the wireless tower companies as
far as products go. All three of them lease similar towers with similar
terms. This makes it hard for AMT to achieve above average returns since
it cannot differentiate on the quality of its product. Most of the
differentiation must come from a management perspective and any
advantage could disappear with management turnover.
Opportunities
India and emerging markets.
o One of AMTs biggest opportunities comes from expansion into emerging
markets, specifically India. With the wireless penetration in the U.S.
nearing 100 percent, the number of new subscribers each year will
decrease. Meanwhile, emerging markets like India have substantial room
for growth. India is expected to double its subscribes from 2009 to 2012.
While AMT does have to compete with foreign wireless carriers and
foreign independent wireless tower companies, it is ahead of its U.S.
competition in expanding abroad.
Smartphones
o Most of the growth in the U.S. market is expected to come from the
movement towards smartphones, which allow the user to access e-mail,
surf the Internet, watch movies, take pictures, listen to music, and much
more. These activities require more network space and wireless
companies are pushing to expand to 4G networks. As of June 30, 2009,
data revenue accounted for 27 percent of total service revenues for
wireless service providers. Also, AMT expects the smartphone
penetration in the U.S. to double from 30 percent to 60 percent by 2013.
Threats
Competition
o AMT faces strong competition not only from SBAC and CCI but also from
the wireless carriers themselves. The three main independent wireless
tower companies operate roughly 40 percent of the wireless towers in
the U.S. with the rest operated by the carriers and smaller independent
companies. While it is easier for the carriers to expand their market by
leasing through the independent tower companies, the carriers to
present a threat since they are much larger in terms of revenue and could

potentially move their business away from the wireless tower companies.
Also, since the tower companies have little differentiation in terms of
product, the competition is strong.
Carrier Consolidation
o While there is not much threat of the four major carriers consolidating,
analysts do expect them to acquire some of the smaller carriers in the
U.S. This hurts tower companies because consolidation means fewer
companies to lease to. Usually there is some overlap of where the parent
company and the acquired company operate and this results in
terminated leases. The tower companies benefit from an increased
number of carriers because then there are more tenants per tower,
which substantially increases profit.

Competitors
There are only three main independent tower companies in the U.S. AMT, CCI,
and SBA Communications Corporation. These companies also compete with the wireless
carriers who also have towers. However, independent towers are considered the
preferred option if a wireless carrier has to lease a tower since it does not want to lease
from a carrier competitor.
Relative Valuation TTM
AMT
CCI
Market Cap
$18.40B
$11.10B
Revenue
$1.77B
$1.73B
Gross Margin
76.00%
67.70%
Op Margin
39.60%
27.10%
Profit Margin
16.06%
-15.35%
ROE
8.70%
-9.70%
ROA
3.34%
-2.49%
Asset TO
0.21
0.16
Financial Leverage
2.51
3.93
Diluted EPS
$0.70
-$0.92
P/E
66.20
-45.00
P/CF
20.80
20.40
Current Ratio
1.94
1.30
AMT = American Tower Corporation
CCI = Crown Castle International Corporation
SBAC = SBA Communications Corporation

SBAC
$4.0B
$568M
67.80%
10.10%
-28.20%
-28.2%
-4.98%
0.18
5.83
-$1.37
-25.4
19.3
1.33

Of the three companies, AMT clearly has the strongest financial ratios and
margins. In fact, both CCI and SBAC have negative profit margins, ROE, ROA, and EPS.
While there is very little differentiation among the actual product, since the companies

lease nearly identical towers, analysts attribute AMTs superior margins to a better
focus on utilizing tower space. While AMT does expand its number of towers, it has
done a better job at determining how many to add. The costs for each new tower are
high but fixed. Since AMT has done a better job at utilizing its tower space, it has better
margins. Also, while AMT does utilize some amount of leverage, it is considerably lower
than its competitors, giving it a more stable balance sheet and better access to
financing. Further, AMT is the most diversified geographically with towers in the U.S.,
Mexico, Brazil, and India. CCI, for example, only has towers in the U.S., Australia, and
Canada. Of the three companies, analysts prefer AMT, with Morningstar analysts
considering AMT the only company in the industry with an economic moat.

Buy
Buy/Hold
Hold
Weak Hold
Sell

Analysts Opinions
AMT
CCI
6
4
8
8
4
6
0
0
0
0
One-Year Comparison

Five-Year Comparison

SBAC
4
8
4
0
0

Relevant News and Info


Good
AMT expanded into Chile in Q2 with the purchase of 287 towers. This is part of
its plan to expand into Latin America. It already has already has a presence in
Mexico and Brazil.
In February of 2010, AMT purchased Indias Essar Telecom Infrastructure Pvt.
Ltd. for $432 million. The deal increased its towers in India from approximately
2,500 to 7,000 and made it the second largest independent tower company in
India.
Analysts, such as James Ratcliffe from Barclays Capital, view the future
conversion to a REIT as a positive. Ratcliffe estimates that American Tower is
trading at 15.5 times projected 2011 funds from operations, which is below the
REIT average of 16.4 times. Further, he expects AMT to grow FFO faster than
other REITs.
Bad
The executive vice president of finance, Jean Bua, announced that she is leaving
the company at the end of September 2010.
Horse-Shoe capital filed a lawsuit worth $100 million against AMT in June 2010
regarding a breach of contract in regards to the sale of XCEL Telecom, an Indian
wireless tower company, to AMT in 2009.

Valuation
Discount Rate:
Beta = 1.467 Risk-Free Rate = 3%
K = 3% + 1.467(11% 3%)
K = 14.74%

Market Return = 11%

SECOND STAGE
Residual Value
Free Cash Flow in year 10
Second Stage Growth Rate (g) (add)
Free Cash Flow in year 11
Capitalization rate (k-g)
Value at end of year 10
Present Value of Residual
Intrinsic Value of Company
Shares outstanding assuming dilution
Intrinsic Value per share

$1,924.3
4.00%
$2,001.3
10.74%
$18,640.83
$4,714.85
$9,653.01
406.9
$23.72

AMT has a ten-year beta of 1.467, yielding a discount rate of 14.74 percent.
Since AMT is in a high-growth industry and the industry leader, the Bloomberg
consensus growth rate is 22 percent while Reuters provides a growth rate estimate of
18 percent. Wanting to be a little more conservative, I used 18 percent for my first stage
growth and then four percent as my terminal growth rate since. This provides an
intrinsic value of $23.72, which is more than $20 below the current price.
The consensus analyst target price for AMT is $49.91 and Morningstar analysts
provide a fair value for AMT of $48. This made me wonder if my assumptions were
correct. After looking more at AMTs stock history, its clear that a ten-year beta is not
the most appropriate beta. AMT traded for under a dollar in 2002 and nearly went
bankrupt. Since then, AMT has had a beta between 1.12 and 1.18, which is its sevenyear beta. That is a more appropriate value since the company has become significantly
more stable since 2002 and has consistently had a steady beta over the last seven years.
Using 1.18 as my beta and keeping the same growth assumptions, the DCF model
calculated the following:
Residual Value
Free Cash Flow in year 10
Second Stage Growth Rate (g) (add)
Free Cash Flow in year 11
Capitalization rate (k-g)
Value at end of year 10

$1,924.3
4.00%
$2,001.3
8.45%
$23,689.38

Present Value of Residual


Intrinsic Value of Company

$7,328.86
$12,769.82

Shares outstanding assuming dilution


Intrinsic Value per share

406.9
$31.38

The intrinsic value of $31.38 is still more than $10 below the current value.
Looking more at analysts reports on the company, Morningstar used a discount rate of
ten percent while JP Morgan used a discount rate of eight percent. Further, Reuters

provides a beta of 0.78 for AMT. While I think this beta is too low, when I used it in the
DCF model the intrinsic value was $54.25. To me this indicates that analysts see AMT as
a lower risk than what its historical beta indicates.

Financial Statements

Sources
Bloomberg Terminal
S&P Net Advantage
Yahoo Finance
Morningstar
AMT 10-K
www.cita.org
http://www.televisionbroadcast.com/article/103220
http://online.wsj.com/article/SB10001424052748704293604575342854039806646.htm
l?mod=googlenews_wsj