We downgrade our recommendation on American Tower Corp. (AMT) to Underperform based on its current valuation. The stock price has moved up by nearly 37.3% in the last one year and currently is at the high-end of its 52-week price range. With respect to several valuation metrics, the stock is also trading at significant higher multiple compared to the S&P 500 average and the industry average. We believe American Tower is overvalued at this stage. The company’s fourth-quarter 2010 net income missed the Zacks Consensus Estimate.
Although our long-term view regarding the tower industry remains positive supported by a spurt of demand for smartphones and other mobile devices, we believe the current valuation of American Tower is already reflecting these positives. Wireless tower industry has become extremely competitive as other tower companies are also trying hard to expand globally. AmericanTowerfiercely competes with its closest rival Crown Castle International Inc. (CCI).
AmericanTower has a substantially leveraged balance sheet. At the end of 2010, the company had more than $4.7 million of net debt (total debt-cash & cash equivalents). High level of indebtedness increases the possibility that the company may not be able to generate sufficient amount of cash to meet its debt obligations in future. This may also hinder the company’s effort to access debt market to borrow and refinance at favorable rates.
Moreover, customer concentration is very high for American Tower. Top two customers accounted for nearly 61% of its quarterly revenue. Loss of any of these customers or consolidation among these wireless carriers will have a significant material impact on the company’s top line.
AmericanToweris quickly expanding in the international markets, especially in the emerging Asian and Latin American markets. Though this geographic diversification will increase revenue, it may jeopardize the bottom line. Tower operations in the emerging markets are not as profitable as that in the mature U.S. market. In the previous quarter, international operation’s gross margin was 67.5% compared with 79.8% of the U.S. operation.
AMER TOWER CORP (AMT): Free Stock Analysis Report
CROWN CASTLE (CCI): Free Stock Analysis Report
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