U.S. tower companies could be in for a slow summer if carriers cut back their spending during the upcoming incentive auction, according to analysts at Evercore ISI.
The FCC is busy reconfiguring the airwaves of TV broadcasters and is likely to begin the "forward auction" in July, when wireless carriers and others will bid for the 600 MHz spectrum licenses at the center of the auction. The entire event could end as early as August, but FCC Chairman Tom Wheeler recently told a Senate subcommittee that the auction may extend into 2017 if the Commission doesn't raise enough to pay broadcasters for their spectrum.
In separate research notes on Crown Castle and SBA Communications in advance of first-quarter earnings reports, Evercore analysts said investors may want to look at other infrastructure segments until the auction is complete.
"While we continue to be long-term tower bulls, we believe carrier spending could remain muted through the end of the incentive auction -- leaving us more bullish in the near-term on other communications infrastructure names (i.e., the data centers)," Jonathan Schildkraut and Justin Ages wrote.
"Against a backdrop of steady (albeit muted) capital investment from the carriers, Crown Castle has the fewest moving parts vs. peers -- notably no FX (foreign exchange) exposure," Evercore observed. "As it applies to 2Q expectations, we believe increased emphasis from carriers on small cells could provide a benefit to results. And, coupled with an initially conservative outlook and the inclusion of a recent acquisition (Tower Development Corporation), Crown Castle should also deliver a mild improvement in guidance."
The analysts maintained a hold rating on shares of Crown Castle, noting its limited risk and "low double-digit expected returns."
They also maintained a hold rating on shares of SBA, although they raised their target price slightly from $105 to $108. SBA's stock has benefited recently from a relatively weak U.S. dollar, the analysts said, as well as a belief that interest rates "can stay lower for longer."
"Within the tower group, SBAC is the least expensive name -- but also has the lowest total return profile, no dividend, highest leverage, and greatest exposure to Brazil," according to Evercore.
SBA owns towers in a handful of South American countries, while Crown Castle operates primarily in the United States.
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