Raymond James 'Takes Some Chips Off The Table,' Downgrades American Tower, Crown Castle and SBA Communications
Raymond James lowered its ratings on telecom tower companies, with the downgrades blamed primarily on valuation. The firm, however, said it remains bullish on the long-term fundamental drivers of the tower industry.
Analyst Ric Prentiss noted that the RMZ REIT Index and the S&P 500 have generated year-to-date returns of 2 percent and 10 percent, respectively, compared to the 19 percent, 24 percent and 30 percent returns generated respectively by Crown Castle International Corp. (REIT)
(NASDAQ: CCI), SBA Communications Corporation (NASDAQ: SBAC) and American Tower Corp (NYSE: AMT). The upside, according to the firm, came about due to the prospects of an improving U.S. tower leasing environment and lower interest rates.
Sentiment Buoyant
Raymond James also identified four reasons for the improved sentiment toward the sector:
Raymond James pointed to the heady valuation, which is now at 19.6 times its 2017 adjusted funds from operations per share estimate. This compares to a historical five-year range of 14 to 22 times front 12-month AFFO per share.
"We believe a fair amount of the optimism described above is now priced into the stocks as evidence by our analysis of consensus estimates and our risk/reward valuation framework," the firm said.
Sprint–T-Mobile: Long-Term Positive
Additionally, the firm believes the potential impact of a Sprint Corp (NYSE: S)-T-Mobile deal has now faded, with the probability of materialization of the deal now reduced. Although tower stocks trade down historically, on announcement of carrier consolidation deals, the firm thinks, longer term, larger and better capitalized entity will be a positive for the tower industry.
The firm's bullish stance on the long-term fundamental drivers of the industry is premised on explosion in mobile data consumption, which will drive network investment to handle the increasing traffic. The firm firmly believes 2017 would be better than 2016 and that 2018 would be better than 2017 for the tower industry.
"But this improved outlook appears to already be reflected in consensus estimates and valuation multiples and we would not be surprised for the next catalyst in tower world to be the negative headline of a Sprint and T-Mobile transaction," the firm added.
Positive On American Tower And SBA Communications
On specific stocks, the firm said it maintains a positive rating on American Tower and SBA Communications, citing faster expected AFFO/share growth, its favorable risk/reward analysis, lower exposure to an Sprint-T-Mobile headline and active stock buyback programs.
Additionally, the firm sees these companies to be greater beneficiaries of T-Mobile's 600 MHz roll. The firm also believes these companies to benefit if the Sprint and T-Mobile deal is pitched to regulators as an expansion of rural infrastructure.
Ratings/Price Target
American Tower and SBA Communications: Downgraded from Strong Buy to Outperform, with a price target of $147 and $153, respectively.
Crown Castle: Downgraded from Outperform to Market Perform.
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