With smartphones now representing over 60% of U.S. handsets, increased data usage is leading to a growing demand for spectrum, which is a key component in carriers’ race over market share. Thus, as an operator of wireless tower communications sites, Crown Castle International Inc. (CCI, Financial) will enjoy the benefits of being in the right place at the right time.
As a matter of fact, the company is the second largest independent operator of wireless tower communication sites in the U.S. and it is the leading tower owner, with roughly 40,000 sites domestically and over 1,700 in Australia.
The firm leases and licenses antenna spaces on its controlled towers to major wireless carriers such as AT&T Inc. (T, Financial), Sprint Nextel Corporation (S, Financial) and Verizon Communications Inc. (VZ, Financial). Moreover, it leases access to its distributed antenna systems for the transmission of wireless signals related to the transmission of voice, video and data.
Long Lasting Upsides with Low Risk
Crown Castle has many advantages running to its favor, which have carved the company a narrow economic moat. For one, it boasts great visibility stemming from the fact that its long term contracts have enabled the firm to have more than 97% of its coming year’s revenue projections already assured.
Secondly, high switching costs make it unlikely for carriers to switch towers, since the costs of such a move would by far exceed the savings from changing to another operator. In addition, zoning regulations hinder carriers to do so. Third, its economies of scale allow the company great cost advantages that result in massive operating leverage.
And lastly, there is the upside of the network effect. Since each tower covers a specific area, multiple carriers will be willing to have presence in the same towers, given this is directly connected to their ability to compete over market share in the areas covered by each site.
Creating Shareholder Value
In early January 2014, Crown Castle began operating as a real estate investment trust. Upon the announcement of this decision, chief executive Ben Moreland stated that this conversion should “lower our weighed average cost of capital and provide additional opportunities for creating long-term shareholder value.” In fact, REITs have to pay 90% of its taxable income to shareholders in the form of dividends every year.
A Solid Growth Projection
Immense growth in mobile Internet traffic compels carriers to improve their coverage and network quality in order to achieve a better transmission. Hence, carriers need more tower space. Consequently, increasing occupancy of space at the existing towers has become the company’s main top-line growth driver.
In fourth quarter of fiscal 2014, site rental reported a 14% revenue growth, which encouraged the firm to raise its guidance for full 2014. Price escalations of 3% to 5% are another revenue booster.
Moreover, margin expansion is expected to accelerate in the coming years as its fixed costs spread over a growing number of tenants per tower. On the other hand, high switching costs benefit the company with recurring revenues, which create reliability in relation to its ability to generate cash flow, thereby increasing its access to credit financing.
Valuation
Crown Castle stock trades at a premium of 263.00 its trailing earnings compared to the industry median of 19.0. This high multiple reflects the increasing demand for this share, based on the projection of sturdy earnings growth in the future.
Its revenues are in a steady upswing, with a robust 15.5% growth compared to its peers’ average of 3.30%. Investment guru Steve Mandel (Trades, Portfolio) continues to increase its holdings in the company, backing my strong feeling about the firm’s unstoppable growth trajectory.
Disclosure: Victor Selva holds no position in any stocks mentioned.
