Clouds appear to be gathering over the tower industry ahead of a Donald Trump administration, but investors should find the market attractive nonetheless, according to MoffettNathanson Research.
“Tower equities have been rocked in the wake of the presidential election,” Nick Del Deo and Sydney Marks of MoffettNathanson wrote in a research note to investors this morning. “It’s hard to find an expected Trump-related change that hasn’t been interpreted as a negative for the group. The regulatory environment will likely be more amenable to consolidation among carriers, boosting the odds that T-Mobile and Sprint get together.”
Meanwhile, the analysts continued, while potential tax reform would benefit many traditional companies, it wouldn’t do anything to help REITs—real estate investment trusts such as American Tower and Crown Castle—leaving them less attractive comparatively. “And expected macroeconomic developments—rising inflation, higher interest rates, and a strong dollar—could be a noxious combination for an industry that is financially levered, signs long-term contracts with fixed escalators, and has invested significant sums overseas.”
Indeed, any significant consolidation in the U.S. wireless industry would spell trouble for the tower market, which would surely see the decommissioning of a significant number of cell sites. And MoffettNathanson noted that inflation expectations, interest rates and foreign currency exchange rates have already moved ahead of what it called “the Trump Effect.”
Despite those potential headwinds, though, carriers will increasingly depend on tower companies to meet ever-increasing demand for mobile data. Spectrum bands such as AWS-3, WCS and FirstNet will be deployed over the next few years, MoffettNathanson analysts said, and Dish Network’s airwaves as well as the 600 MHz spectrum currently being auctioned off are also likely to be put to use. AT&T, which several months ago launched a widespread effort to reduce the rental and leasing rates it pays to cell tower owners, “will eventually begin leasing at a more normalized rate” to meet customers’ demands. And the eventual rollout of 5G services from mobile network operators will likely boost the tower market, just as the deployment of 4G did a few years ago.
“Against a backdrop of extremely poor sentiment—with macroeconomic concerns a primary component—and decade-plus lows in relative multiples, the towers strike us as quite attractively valued. The business models are far from broken, even if they are currently posting trough growth rates, and discount quite draconian expectations,” the analysts wrote. “The risk reward for long-term investors remains quite favorably skewed as the clouds casting shadows over the industry should eventually dissipate and the underlying businesses ought to continue posting solid results.”