Tower companies to benefit from tax reform, emergence of IoT, analysts say

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Capex deductibility would spur increased network investments from carriers, Wells Fargo said

Tax reform and the emergence of the IoT are two reasons for tower companies to be grateful this holiday season.

Cutting taxes has become a top priority for Congress under Donald Trump’s administration, and wireless carriers—like companies in countless other industries—are very much in favor of the move. AT&T CFO John Stephens said recently that his company is “optimistic about tax reforms,” and T-Mobile CFO Braxton Carter said last week that T-Mobile likely wouldn’t be in a position to pay cash taxes for roughly the next seven years under tax bills currently working their way through the House and Senate.

And the new tax proposals wending their way through Congress would likely boost carriers’ capex, ultimately benefitting tower companies, Wells Fargo Securities said this week.

“We expect many of our companies to be net beneficiaries based on the a) proposed corporate tax reduction from 35% to 21%, and b) 100% upfront deduction for capital expenditures,” Jennifer Fritzsche of Wells Fargo wrote in a research note. “Based on our initial analysis, we believe Verizon, AT&T and Dycom will be the biggest beneficiaries given their tax obligations, capital intensity (Verizon and AT&T in particular) and moderate leverage which will enable them to fully deduct interest expense.”

The proposed new tax structure would boost AT&T’s free cash flow from capex deductibility by roughly $1.6 billion, Fritzsche said, and Verizon’s deductibility by $1.2 billion. And those savings would be particularly important as carriers up their network investments in advance of 5G deployments.

“We believe the capex deductibility provisions could lead to the wireless carriers accelerating investment as they begin to develop 5G architectures,” she continued. “Given the many upcoming projects by the wireless carriers (AT&T with FirstNet, T-Mobile with 600 MHz, Sprint with broader network investment, Verizon with Fiber One), we believe many investments could be accelerated to take advantage of capex deductibility, which could boost demand for the tower and fiber players. Furthermore, the deductibility and cash repatriation provisions could increase near-term infrastructure demand for the cloud/tech players, therefore benefiting the data center REITs (real estate investment trusts).”

Meanwhile, Dish Network’s effort to leverage its significant spectrum by building out an NB-IoT network should also boost the tower segment, Guggenheim Securities wrote. Charlie Ergen, who co-founded the satellite TV provider and owns 52% of the company, said earlier this month he was stepping down to oversee Dish’s wireless’s efforts.

“For some time, the market has wondered what Dish’s ultimate intentions were for its cache of spectrum—spurring discussion in the press that without a development plan, the company could increasingly be viewed as an acquisition target,” Robert Gutman of Guggenheim wrote. “While such an event could occur in the future (we have no view on this), the build-out of a new wireless network could provide some additional tailwind to the towers. It is difficult to parse just how much of a boost the deployment of an NB-IoT network will be given the uncertainty surrounding its structure and requirements. But, the fact that talks with tower cos are ongoing underscores the possibility this presents for growth relatively near-term.”