Down 17%, is the US tower stock still a buy?


American Tower (NYSE: AMT) has been an outstanding artist over the years. Since its conversion into a real estate investment trust (REIT) in 2012, it has produced an annualized total return of almost 17%. This outperformed the overall market, with the S&P500 offering a total annualized return of 14.8% during this period.

However, the past few months have been a different story. The shares of the Infrastructure REITs fell 17% from their recent peak. Here’s a look at whether this sale is a great buying opportunity for this REIT.

Image source: Getty Images.

What is hanging over the American tower

There are several reasons why American Tower shares have left their peak. The broader market cooled, driven by inflation and interest rate concerns. These headwinds weighed heavily on the technology and real estate sectors. These factors could slow growth by making it more expensive for businesses to borrow money while increasing operating costs.

Meanwhile, American Tower took action that worried investors. It spent more than $20 billion on acquisitions last year, including buying old REIT data center CoreSite Realty for $10.1 billion. This deal was a significant departure from its core cellphone tower business, adding significant integration risk. It also pushed its debt ratio well beyond the company’s target range. American Tower ended last year with a leverage ratio of 6.8, well off its target of below 5.0.

Finally, the merger of Sprint with T-Mobile (NASDAQ: TMUS) is causing some short-term churn in American Tower’s cell tower business in the United States. This headwind will cause its organic tenant billing growth in the U.S. and Canada to slow to 1% this year, from the 5% growth it would have achieved without T-Mobile using less laps as a result of the Sprint deal.

What future for the infrastructure REIT

There is no doubt that American Tower is experiencing short-term headwinds. We saw it in its first quarter results. While the REIT’s adjusted operating funds (AFFO) per share grew 6.1% year-over-year, that’s a much slower pace than the 11.7% growth in the AFFO per action he performed in 2021.

However, American Tower expects a reacceleration in its results later this year. Demand for its US cell towers is growing as cellphone carriers use them to deploy their 5G networks. CEO Tom Bartlett said in the earnings press release that, “We are off to a strong start in 2022 with sequential acceleration in organic tenant billing growth in each of our reported segments. 5G is ramping up in the US and Europe today, as 4G coverage and densification initiatives continue to grow in early stage markets, and it is clear to us that macro towers will continue to be critical infrastructure for investments in transport networks over the next decade and beyond.”

The company sees strong future growth, powered by 5G. The CEO said on the first quarter conference call that he expects “strong growth in our tower assets, both in the near and longer term”. He said organic tenant billing growth is expected to accelerate in the second half of this year and exit 2022 at a high point. Meanwhile, it sees “strong single-digit organic growth in tenant billing in 2023 and beyond.”

Combined with its faster-growing international operations and new data center platform, American Tower is seeing annual growth of at least 10% in AFFO per share through 2027. This should enable the company to continue to increase its dividend, which now yields a more attractive 2.2% after the recent decline in the share price.

The liquidation of American Tower looks like a great buying opportunity

While American Tower faces short-term headwinds, its future looks bright. It expects demand for towers to remain strong, which should reaccelerate its growth later this year. The recent stock price crash seems like a great opportunity to buy shares of this fast-growing REIT at a lower valuation and higher dividend yield.

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Matthew DiLallo holds positions in the American Tower. The Motley Fool fills positions and recommends American Tower. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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