The real sweet spot in the mobile industry may not be the handsets or even the networks. The real sweet spot may lie in the towers.
The business of owning and running cell phone towers is separate from the business of owning networks. And a small number of companies have been busily consolidating the space in the last few years, to the profit of smart investors.
In the latest deal, American Tower Corp (NYSE:AMT), the second-largest tower owner, has agreed to buy the parent of Global Tower Partners, the fifth-largest player, for about $4.8 billion. Wireless Cost Estimator says that GTP has 5,683 towers, meaning AMT is paying about $845,000 per tower.
In addition to growing through purchases, these companies are also growing through lease buyouts of towers owned by others.
So, ready to buy into the tower business?
Mobile network providers were the original builders of most cell phone towers, back in the 1980s. They were powered by laws that essentially required zoning authorities to allow the construction. I remember visiting a city council meeting on other business 20 years ago and watching a network operator try to intimidate that council into approving a tower over a transit station near my house.
After building many towers, however, the industry quickly found advantages to renting space rather than owning. Renting let them share the infrastructure, and avoided risks like workers falling off towers and neighbors’ claims that the towers cause cancer.
These companies have become especially hot lately due to the roll-out of 4G LTE services across the industry. The Great Recession slowed the development of this technology, but the industry is now going full-speed ahead, and each time they turn on service in an area they not only have to rent more tower space, but gain permission to go up towers and put in new equipment.
The opportunities and risk aversion by network providers have caused a slow, accretive consolidation of the industry around a few major players, whose business it is to own cell towers. Here are three of the best investments:
SBA Communications offers geographic diversity
The best performer in the group is SBA Communications Corporation (NASDAQ:SBAC), based in Boca Raton Florida, whose stock is up about 370% since the start of 2009.
SBA Communications Corporation (NASDAQ:SBAC) doesn’t just operate in the U.S., but in Central and South America as well, where cell phone service is even more vital than it is here, there being little wired infrastructure to compete with. The company has about 15,000 towers in the U.S. alone, making it the third largest tower operator here, and bought over 3,000 sites in North and South America in 2012, entering the Brazil market for the first time.
The result has been spectacular top-line growth, with quarterly revenues rising 41%, from $229 million to $324 million, from the second quarter of 2012 to the second quarter of 2013. Getting out ahead of this growth means the company is still losing money, but on an operating basis it had income of almost $44 million for the most recent quarter. The balance sheet shows a very hefty debt-to-assets ratio of almost 87%, but investors are willing to pay for growth. Over the last year the stock is up 27%.