New Street Research analyst Spencer Kurn concluded in a report to his investors yesterday that towers are near peak organic growth and peak multiples.
“As organic growth declines over the next couple of years, and those declines are potentially exacerbated by the Sprint/T-Mobile merger, we think the stocks look fully valued,” Kurn said. “We no longer recommend owning any of the towers,” he said.
New Street announced the following actions:
- downgrading SBAC to Neutral (TP: $236)
- downgrading CCI to Sell (TP: $113),
- remaining Neutral on AMT (TP: $219)
“Even in the most bullish scenario for growth (5G without a merger),” Kurn said, “we believe the towers would need additional multiple expansion to see material upside. This may be possible; however, with organic growth poised to decline over the next several years, with or without 5G, we see greater risk of multiple contraction.”
Kurn said they analyzed the organic growth outlook across four growth scenarios: their current forecast, their forecast with 5G, and the impact of the Sprint/T-Mobile merger on both. They then applied three different multiples to their four growth scenarios to derive a valuation range:
- 1.7x P/AFFO/Growth, in-line with Data Centers and historic tower comps
- 2.2x P/AFFO/Growth, in-line with the RMZ
- 2.7x P/AFFO/Growth, in-line with the highest-trading REIT subsectors.
Kurn said New Street has been long-time tower bulls on the premise that growth expectations were too low, and valuations were cheap, relative to REITs. The call has worked well, he said, as the stocks are up 93 percent over the past three years, outperforming the S&P by 46 percent.
“The towers are still phenomenal businesses,” according to Kurn “and we don’t downgrade lightly; however, both tenets of our thesis are now more controversial.” He believes organic growth is cresting in 2019, and will decline through at least 2023, and the Sprint/T-Mobile merger could make matters worse. At the same time, multiples have expanded 6x since the start of the year and towers are no longer cheap.
“There is still potential upside from multiple expansion or Sprint/T-Mobile merger conditions,” he said, “but we think multiples look vulnerable in the face of declining growth. SBAC still remains our favorite tower company, but we would rather own Data Centers within Communications Infrastructure, who offer similar growth prospects as towers yet trade at sharp discounts to towers and the broader REIT universe.”
June 14, 2019