Many of Crown Castle’s towers are also located in areas with strict zoning restrictions and other regulations, limiting supply and making its infrastructure harder to replicate by new entrants.
Crown Castle’s cost structure is also fairly stable because the company maintains long-term control over the majority of land under its towers.
About one-third of Crown Castle’s site rental gross margin is generated from towers on land the company owns, and its current portfolio of ground leases have an average remaining term of about 31 years.
Importantly, over 75% of its site rental gross margin is from towers where the land is owned or controlled by company for at least 20 years. There is little risk of Crown Castle losing control of its real estate assets.
As a result of continuously growing demand for data and a portfolio of mission-critical wireless infrastructure, Crown Castle has delivered extremely reliable growth throughout numerous market cycles. In fact, the company’s rental revenue and gross income has increased every year since 2002.
The company also maintains an investment grade credit rating, which allows it to continue accessing capital on favorable terms to invest opportunistically in growth projects.
Overall, Crown Castle has a fundamentally strong business that seems to have a solid outlook for at least the next five years. The company possesses a number of the factors I look for to find safer stocks.
Crown Castle’s Key Risks
The biggest risks facing Crown Castle are customer concentration and evolving technological trends.
AT&T Inc. (NYSE:T) (30% of rental revenue), T-Mobile US Inc (NASDAQ:TMUS) (22%), Sprint Corp (NYSE:S) (19%), and Verizon Communications Inc. (NYSE:VZ) (18%) account for about 90% of the company’s total revenue.
The U.S. wireless market is an oligopoly, so there’s really not much Crown Castle can do to diversify its customer base.
While the U.S. wireless market is relatively stable, Sprint faces financial difficulties and has been slashing spending to begin working down its substantial debt load. The company has lost money for seven straight years and is struggling as the smallest “major” carrier.
Will Sprint’s struggles impact Crown Castle? It’s hard to say. The company is likely too large to be acquired by one of the other major carriers due to anti-trust concerns, and it’s difficult to know if it would benefit from cutting back its business with Crown Castle – a lower quality network with less coverage isn’t exactly a winning strategy. Regardless, Sprint’s situation is certainly worth monitoring because the company faces legitimate financial challenges.
It goes without saying that the loss of any of Crown Castle’s major customers would be devastating. However, I think this risk has a very low probability.
Non-renewals are usually the result of mergers between carriers because they can consolidate their wireless infrastructure needs. Recent examples include AT&T, T-Mobile, and Sprint acquiring Leap Wireless, MetroPCS, and Clearwire, respectively.
For now, Crown Castle is the largest wireless infrastructure player in the market and has long-standing relationships with the major carriers. It’s hard to imagine any of them being able to operate a network without the use of Crown Castle’s products and services, which likely explains the excellent 2% non-renewal rate the company has historically enjoyed.
Besides customer concentration risk, Crown Castle could be impacted by changes in wireless deployment technology.
If wireless networks become more efficient (e.g. network sharing) or experience a substantial change in design, demand for Crown Castle’s wireless infrastructure could decline.
Other technologies such as WiFi, small cells, satellites, and mesh transmission systems could eventually serve as substitutes for the company’s wireless infrastructure as well.
None of these potential evolutions can happen overnight, but they could potentially jeopardize Crown Castle’s earnings 5-10 years from now – no one knows.
The company’s industry is also heavily regulated by the FCC, FAA, and local ordinances. They control the siting of towers and oversee tower and antenna structures, amongst other issues. It seems unlikely that a new regulation would crop up and harm Crown Castle’s business, but the company does face some regulatory risk.
Finally, near-term demand can be impacted by trends in capital spending by the major carriers. If they decide to pullback on plans to expand their coverage or capacity, Crown Castle could temporarily see reduced demand for its wireless infrastructure. This risk factor doesn’t impact the company’s long-term outlook, but it could potentially cause near-term volatility.
Overall, there are a few risks that could jeopardize the company’s very long-term future. However, the near- to mid-term outlook looks good. Technology changes are likely to happen at a moderate pace, and it’s hard to imagine any of Crown Castle’s major customers no longer needing its services anytime soon.
