Stifel Nicolaus Expert Analyst Sees New Surge Of Spending For Small Cell Architecture And Identifies His Stock Picks For This Growth Pocket

Wall Street Transcript

67 WALL STREET, New York - July 23, 2012 - The Wall Street Transcript has just published its Wireless Communications & Telecom Report. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: 4G Infrastructure Capital Expenditures - Tower Cell Splitting - Global Wireless Spectrum Allocation - Telco Dividend Yields

Companies include: American Tower Corp. (AMT), Crown Castle International Cor (CCI), SBA Communications Corp. (SBAC), Verizon Communications Inc. (VZ), AT&T, Inc. (T), Sprint Nextel Corp. (S) and many others.

In the following interview excerpt from the Wireless Communications & Telecom Report, Ben Lowe, an expert analyst with Stifel, Nicolaus & Company discusses his outlook for the sector.

TWST: Who are your favorite names, and why do you like them?

Mr. Lowe: I guess if I had to rank them, American Tower would be number one; Crown Castle, number two; and SBA Communications, three. American Tower has the most scale and is well positioned to benefit from the attractive industry trends while also capitalizing on company-specific growth initiatives including their ongoing investment overseas.

I'd say when you look at AMT and SBA, they have been investing more aggressively over the past several years to expand their portfolio, and a big part of that, particularly for AMT, has been their expansion into emerging markets, where now international accounts are about 30% of their total business. What that should do is help them sustain higher growth rates going forward as the domestic business matures. What they have done is redeploy that capital from the domestic business and looked to take that colocation model - so the idea of having multiple tenants on a single piece of infrastructure is colocation whether you are talking about towers or data center - and introduce that colocation model into emerging markets, where it's kind of the way the U.S. looked 10-plus years ago, where the carriers predominantly own their own tower portfolios and there aren't really a lot of independent operators.

AMT has gone into a lot of these emerging markets and introduced this model, where they are doing sale leasebacks with some of the incumbent carriers in those markets, and they'll buy that tower portfolio again. It will have a low average tenancy, and then they are going to increase that cash flow on those sites over time as they add tenants. That serves to enhance and extend their growth opportunity. AMT has been the most aggressive on that front. SBA has followed too to some extent, but international is pretty small.

Crown has taken the approach that they don't really feel like you are getting an adequate premium return to go into those emerging markets, where there is inherently higher risk. What they have done is chosen to, one, redeploy their capital in terms of buying back stock, and then, this year, we've seen them step up their investments, where they have made some big investments on the distributed antenna side, or DAS, which is small cell architecture, where you think about the traditional tower model as a macro cell.

We are seeing small cells deployed in areas where carriers can't get adequate coverage with macro towers, whether it's because of local zoning restrictions, where they don't want a big, 200-foot steel structure in a given area, or if it's just limitations from a topography standpoint, where you just can't get adequate coverage. So one option for carriers is to deploy these smaller cells to increase the capacity in those areas.

You've seen over the past several years Crown trade at a discount to its peers. It's a relative value play within the group, but looking at AMT and SBA, both have been able to generate attractive growth, though SBA is running at a much higher leverage to help fund that growth. And so when you think about it from a cost-of-capital perspective, AMT has significant advantage on that front, and they are able to still maintain very attractive growth rates.

Out of the two faster-growth names of AMT and SBA, my preference would be AMT. And then, Crown still represents a relative value play out of the three, although that gap has started to close this year as they've stepped up their investments and been rewarded for doing so, in my opinion. But again at a high level, all three from a fundamental perspective are well positioned to benefit from the secular growth trends driving ongoing investment by the carriers. Putting SBA at three is ultimately more of a valuation call.

TWST: You said there are three public companies. Are we going to see anybody else going public because of the towers being so well positioned?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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