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Why You Shouldn't Look At SBA Communications Corporation's (NASDAQ:SBAC) Bottom Line

Simply Wall St

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SBA Communications Corporation is a US$26b large-cap, real estate investment trust (REIT) based in Boca Raton, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how SBAC’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess SBAC.

See our latest analysis for SBA Communications

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$851m makes up 61% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NasdaqGS:SBAC Historical Debt, July 15th 2019

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 8.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SBAC 12 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.

Next, interest coverage ratio shows how many times SBAC’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 2.13x, SBAC is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at SBAC's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. SBAC's price-to-FFO is 31.15x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. SBA Communications can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

  1. 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.
  2. 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.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.