Wireless Tower Firms Call on Moats to Succeed
The investment prospects of American Tower, Crown Castle, and SBA Communications tower above those of telecom peers.
The near-term momentum in the wireless tower industry is undeniable, and we believe there is still meaningful upside for American Tower (AMT), Crown Castle International (CCI), and SBA Communications (SBAC), given how economically compelling the sector's fundamentals are. Over the past six months, the industry has seen an unprecedented level of leasing activity from the four major U.S. carriers that are actively engaged in 4G LTE network deployments. When we consider the consistency and reliability of the industry's cash flow generation, expansion overseas, and the improving economic efficiency of the operating models, we believe these firms will outperform the market for the foreseeable future. We define economic moats as sustainable competitive advantages that allow firms to generate positive economic profits for an extended period. The underlying sources of economic moats are switching costs, intangible assets, network effect, and efficient scale. While American Tower remains our top pick, we believe the entire sector will continue to outperform the market in 2013.
Switching costs ensure low churn rates. There are considerable switching costs in the industry. It would cost a carrier roughly 20 times its monthly rent to take its equipment off a tower and move it to a neighboring tower. It is not an economically viable decision to pay $40,000 in an attempt to save $200 per month at a competing tower operator.
Imari Love does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.