Tuesday, April 9, 2013

American Tower is a Long-Term Buy

According to Charlie Munger, in order to be successful in investing, investors just need to find a few great companies and hold on to them. Indeed, there were several stocks that kept appreciating for the last 10 years. One of them is American Tower (NYSE: AMT), a wireless and broadcast communications infrastructure company. Since 2003, American Tower has risen by more than 1,400%, from around $5 per share in 2003 to $77 per share. Should investors consider American Tower a buy after its 10-year significant rise in its stock price? Let’s find out.
Business snapshot
American Tower is a leading independent owner and operator of more than 54,600 wireless and broadcast communication properties for lease to radio, television broadcast companies, and wireless data providers. The company operates in three main business segments: domestic rental and management, international rental and management, and network development services. The majority of the revenue, $1.94 billion or 67.8% of total revenue, was generated from the domestic rental and management segment. The second biggest revenue contributor was international rental and management, with $862.8 million in revenue in 2012.
Constant, predictable and growing cash flow
Since the beginning of 2012, American Tower has been restructured to become a REIT. As a REIT, American Tower must distribute to its shareholders at least 90% of its taxable income. In 2012, the company distributed more than $355 million in regular cash distribution to shareholders. Over the past several years, American Tower’s Adjusted Funds from Operations (AFFO) and AFFO per share have been growing consistently. AFFO increased from $642 million in 2007 to $1.2 billion in 2012, while the AFFO per share rose from $1.51 to $3 in the same period.
What makes me interested in the company is its business model that generates the growing and predictable stream of cash flow. Normally, the lease contract would last from five to ten years, with multiple five-year renewal terms. American Tower reported that about 79% of its current lease would last for at least 5 years more. In 2012, AT&T Mobility was the largest tenant, accounting for 18% of its revenue. Sprint Nextel ranked second, accounting for 14% of total revenue, while Verizon Wireless and T-Mobile USA represented 11% and 8%, respectively.
Chuck Akre loves this stock
Chuck Akre, a famous investment manager, has been bullish about American Tower for several years. As of December 2012, he held nearly 1.7 million shares of the company, accounting for 9.3% of his total portfolio. What he likes about American Tower is theincremental returns on capital are “off the charts.” Over the years, the company has spent a part of its cash flow to acquire existing towers and build new ones. Then the balance of the cash flow would be used to pay off debt, and repurchase shares. 
The best stock among peers
At the current price of around $77 per share, American Tower is worth nearly $30.5 billion on the market. It has a quite expensive valuation, at 20.6 times EV/EBITDA. However, compared to its peers, including Crown Castle International (NYSE: CCI) and SBA Communications(NASDAQ: SBAC), American Tower has the cheapest valuation.
Crown Castle International is trading at around $72 per share, with a total market cap of nearly $20.9 billion. The market is valuing Crown Castle at more than 21 times EV multiple. SBA, the smallest company among the three, is worth nearly $9.4 billion on the market. With its share price of around $73, it is the most expensive at 24.84 times EV/EBITDA.
American Tower seems to be the most profitable company. Over the past 12 months, American Tower had the highest operating margin at 42%. SBA generated the lowest operating margin at 20%, while the operating margin of Crown Castle stayed at 36%. Interestingly, American Tower employed the least amount of leverage compared to the other two companies. While its debt-to-equity ratio was only 2.1, the debt-to-equity ratios of SBAand Crown Castle were much higher, at 3.7 and 10.8, respectively.
Foolish bottom line
With the lowest valuation, the lowest leverage, and the highest operating margin, I personally think that American Tower is definitely a long-term stock for long-term investors.