SBA Communications Corporation is a US$19b large-cap, real estate investment trust (REIT) based in Boca Raton, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. In this commentary, I’ll take you through some of the things I look at when assessing SBAC.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of SBAC’s daily operations. For SBAC, its FFO of US$818m makes up 64% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether SBAC has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take SBAC to pay off its debt using its income from its main business activities, and gives us an insight into SBAC’s ability to service its borrowings. With a ratio of 8.8%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SBAC 11.38 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
I also look at SBAC’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 2.35x, SBAC is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing SBAC, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. SBAC’s price-to-FFO is 22.93x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
SBA Communications can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I’ve only covered one metric in this article, the FFO, which is by no means comprehensive. I’d strongly recommend continuing your research on the following areas I believe are key fundamentals for SBAC:
- Future Outlook: What are well-informed industry analysts predicting for SBAC’s future growth? Take a look at our free research report of analyst consensus for SBAC’s outlook.
- Valuation: What is SBAC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SBAC is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.