Cowen initiates tower coverage with 'outperform' ranking

The tower sector represents the best growth opportunity in the telecom and data services sector for large-cap investors, said Cowen and Co. L.L.C., which today initiated coverage on the three public U.S.-based tower companies and said they are all expected to outperform.
Cowen analyst Colby Synesael believes American Tower Corp., (AMT) the largest tower company of the three, could outperform the market by 26.8% in the next year. Crown Castle International Corp., (CCI) could outperform the market by 29.1% in the next 12 months, while SBA Communications Corp. (SBAC) could outperform the market by 31.2%.
“Increasing utilization of 4G data services will lead to upward estimate revisions and EBITDA (earnings before interest, taxes, depreciation and amortization) multiple expansion over the next few years for all three public tower companies and that this should lead to consistent stock appreciation during this time,” the company said. “While individual financial performance will vary because of respective geographic strategies (especially international expansion) and targeted balance sheet leverage, we believe each company’s heavily weighted exposure to the U.S. market will have a large influence on stock performance. We expect growth to come from (1) consistent revenue per tenant growth, (2) consistent cell site growth, and (3) consistent wireless tower growth, which in turn should sustain organic annual revenue growth of at least 8% thru 2014. We expect EBITDA and FCF (free cash flow) to grow slightly faster considering the significant contribution margin inherent in the tower model.”
Cowen noted that American Tower and SBA are becoming more aggressive internationally, which carries more risk but the higher potential for reward.
The analyst firm also noted the high barrier to entry will sway wireless operators to collocate instead of build new towers. “The high cost to construct new towers as well as the zoning issues make it more logical for carriers to add equipment to current towers when possible. We estimate that it costs >$300/mo to add a deployment to a current array versus >$1.5K/mo to go to a new tower (excludes shared capex costs).”
Finally, Synesael said the companies could increase to trade at multiples of around 20 times, near historical highs last seen in the last half of 2007 and the first half of 2008, when operators were building out 3G networks.