On 30th July, American Tower (AMT, Outperform) reported galactic second quarter earnings results surpassing consensus estimates. Revenue of $1.03 billion (up 27.3%) was nearly $31 million above consensus expectations as company’s sites grew by 1,112 (642 new constructions, 508 acquired, 38 lost in adjustments) quarter on quarter to 68,822 or simply 22% year over year, which ultimately added 4% rise in revenue per tower. American Towers bought nearly 2530 towers owned by BR Towers S.A. and exclusive rights of another 2110 towers too for $978 million. This increases total tower counts to 73,000 after the deal is closed by end of year.
The usage of networks on 4G is growing high so operators require greater density and improvement in capacity. 4G build-out and densification is providing boost to site demand. Organic core revenue grew by 11.4% year over year in second quarter in the U.S. and 17.9% worldwide. We consider global operations main reason after company’s galloping growth. AMT has in excess of half of its communication sites in global markets, which raises diversification and increment to its growth outline improving its ROIC expansion prospects.
Regardless of the rise in sites with fewer tenants, company achieved EBITDA margin of 62.8 percent, a 130 bps rise year over year. However gross margin dropped by 120 bps to 74.1 percent as segment operation margin was stable at 68%. The remarkable rise in EBITDA (which is 30.2 percent) and AFFO (which is 29.4 percent) was positively influenced by the salvage of corporate expenses and quick revenue credit under a multi-year equipment contract. The growth also shows a combine organic core gross margin changeover rate of 95 percent (Excl. pass through).
Worldwide growth seems American Tower’s key to increasing potentials. However, AMT’ revelation to emerging markets invite foreign exchange risk and regulatory ambiguity to its outline. In United States, most of its sites are hired by four players. Major change in any client’s spending can also invite hurdles for AMT.
Management is confident and hopeful for future prospects as it has increased full year guidance to $1.755 billion to $1.795 billion (from $1.725 billion to $1.765 billion. Full year rental revenue is likely to range in $3.945 billion to $4.015 billion from $3.895 billion to $3.975 billion. Company expects domestic revenue will be around $2.625 billion compare to its international revenue of $1.355 billion. As per guidance, Capital expenditure will range in $75 million to $925 million or $1.025 billion. Company is planning to build at least 2,250 to 2,750 new sites. Considering result and guidance, we believe shares of American Towers are still undervalued. We raise price target to $105 and maintain ‘Outperform’ rating.