U.S. carriers are increasingly turning to small cells to densify their networks, but the tower industry is in good shape in 2016 and beyond, Pacific Crest Securities wrote in a research note. And American Tower is particularly well positioned.
"Towers are attractive businesses in a variety of economic environments," analysts Michael Bowen and Brandon Nispel wrote. "Highly recurring revenue streams, contracted rent escalators, high contribution margins, high barriers to entry and difficulties for customers to exit make towers attractive, in our view. Rising interest rates have minimal effect on their ability to receive funding and limited impact on AFFO (adjusted funds from operations) per share, and a slowing macro environment generally does not lead to major changes in carrier investment plans as wireless infrastructure is increasingly needed for mobile communications around the world."
LTE buildouts have slowed in the U.S., Pacific Crest continued, but they're only now ramping up in India and some other emerging markets. And American Tower is already established in some of those major regions.
"American Tower is rapidly expanding into new markets, particularly India, and has a diversified geographical portfolio of towers that differentiate it from its competitors," the analysts wrote. "AMT has the No. 1 or No. 2 market position in many of the markets in which it operators, which provides it with a deep relationship with its customers as they deploy wireless infrastructure in a variety of markets."
Pacific Crest's note may calm the fears of investors concerned about carriers' adoption of small cells at the expense of macrocells. American Tower, Crown Castle and SBA Communications all fell substantially in January, for instance, after a report that Sprint had finalized plans to move its towers from space leased by traditional tower companies, instead using smaller cells on government land where rent is cheaper.
While Sprint has made no secret of its pursuit of small cells, the operator has said they will be used in addition to macrocells rather than in place of them.
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