Disclaimer– This article is for informational purposes and does not constitute financial advice. Please consult with your financial advisor before making any investment decisions. Please read full disclaimers here. Author of this article owns SBAC stock.
Current Price: $118; Potential Upside: 15-20%
SBA Communications (SBAC) is one of three publicly traded wireless tower operators in the United States, the other two being AMT and CCI. SBAC leases space on its wireless tower assets to the wireless carriers, such as AT&T, Verizon, T-mobile, and Sprint. Given the strong growth in consumer wireless data consumption, the wireless carriers continue to invest in their networks by placing new cell sites on SBAC’s towers in order to keep up with consumer demand.
Although SBAC is a popular stock among tech-media-telecom investors, the investment community continues to underestimate the tailwinds to SBAC’s business, which should provide upside to current growth expectations
- Wireless Data Growth to be driven by video– Cisco estimated that mobile video traffic as a % of total mobile traffic will reach 70% by 2018 from 56% at year-end 2013. These estimates were made before the flurry of online video introductions in 2015 from DISH, Sony, HBO, and many others. As consumers utilize more of these video services through their tablets and smartphones, wireless carriers will need to continue to invest in their networks to handle the growing popularity of mobile video.
- Portfolio Growth– analysts typically assume 0-5% portfolio (M&A) growth in their forward estimates, which is lower than management’s target growth of 5-10% and actual historical growth rates. With more than $1Bn of investment capacity per year and management’s track record of exceeding portfolio growth expectations, SBAC has ample room to surprise vs. investor expectations.
- FirstNet Probability Increasing – After Sept 11, the government has been focused on building a robust public safety network for first responders. The first step towards building this public safety network, known as FirstNet, was to secure the necessary funding for its buildout. Early in 2015, FCC Auction 97 of AWS-3 spectrum concluded and generated $40Bn+ in proceeds to the government, and a portion of these proceeds has been earmarked for FirstNet. Although it will likely take a few years for actual leases to be signed with tower companies, the likelihood of a public safety buildout is increasing, and if it comes to fruition, this is a major source of new revenue to the tower operators
- New Entrants – In addition to FirstNet, there could be new entrants into the wireless space now that more and more video is being consumed outside of traditional cable TV bundles. For example, DISH Networks has vast wireless spectrum holdings that have not yet been deployed. Although DISH is unlikely to build a wireless network on their own, they appear to be serious about deploying the spectrum with a partner, which will require new leases to be signed with the tower operators.
- US Dollar– Throughout late 2014 to early 2015, the strength of the US dollar has served as headwind to SBAC’s international revenues. Although it is impossible to predict the future direction of the US dollar, it appears that investors believe US dollar strength is more likely than US dollar weakness. This sets up well for SBAC as investors may give them a pass on future dollar strength, but be pleasantly surprised if the US dollar weakens.
Near to medium-term – continued strong organic growth driven by wireless carrier investments in their network
Near to medium-term- portfolio growth and share buybacks
Medium to long-term- potential new entrants including DISH and FirstNet
SBAC currently trades around 21x its 2015 AFFO/share guidance. I believe SBAC could maintain 15-20% AFFO/share growth, which at a constant multiple would imply that SBAC stock could appreciate at a rate consistent with its AFFO growth.
- Wireless carrier consolidation- the biggest risk to the story is a combination of two major wireless carriers, which would lead to removal of overlapping cell sites from the combined wireless networks. After the FCC and DOJ denied the AT&T and T-mobile proposed combination and discouraged the combination of Sprint and T-mobile, it appears the risk of major wireless carrier combinations is fairly low in the near to medium-term.
- Rising interest rates- since SBAC’s AFFO growth has benefited from utilizing a low interest rate environment to accretively acquire smaller tower portfolios, a higher interest rate environment could slow the pace at which SBAC could make accretive acquisitions. However, SBAC and the tower operators have operated and performed well in prior high interest rate environments, so this risk is likely manageable over time.