American Tower Corp. and Crown Castle International Corp., whose shares have reached records this month, are in a sweet spot: handling a surge in cellular traffic as wireless companies upgrade for a new generation of bandwidth-hungry smartphones and tablets.
As more wireless carriers convert to faster long-term evolution technology, known as LTE, worldwide mobile data traffic will soar 18-fold by 2016, according to Cisco Systems Inc. At the end of last year, 54 service providers offered LTE, according to researcher Maravedis Inc., and about 224 more plan upgrades to the technology. By 2016, 469 million subscribers worldwide could be using LTE networks.
That new traffic translates into soaring growth prospects for tower operators, the companies that lease space to the networks for the growing panoply of antennas they require to move all that data around.
“Towers remain the most attractive business in telecom,” said James Ratcliffe, an analyst at Barclays Capital Inc., in a July 16 research report.
American Tower has climbed 15 percent this year, reaching an intraday high of $73.04 on July 17, while Crown Castle has surged 29 percent, touching $60.91 on July 16. American Tower still has a buy rating from 84 percent of analysts, while 61 percent recommend buying Crown Castle, according to data compiled by Bloomberg.
Analysts predict further increases as Verizon Wireless and other mobile-service providers, which lease tower space to transmit voice and data signals, upgrade networks to handle data-intensive smartphones and tablets.
Even with a lull in iPhone sales reported yesterday by Apple Inc., analysts expect demand to surge later this year when a new version is released. New Apple products and a plethora of smartphone models made by Samsung Electronics Co. and other manufacturers are also forecast to drive down prices for handsets and tablets and stoke even more demand for data.
Telecommunications companies’ capital expenditures -- including tower equipment -- will climb 15 percent to $345 billion by 2016 from $301 billion last year, according to Infonetics Research.
“We are very positive on towers,” Jennifer Fritzsche, an analyst at Wells Fargo Securities LLC, said in an interview. “The runway is quite long for these guys.”
Barclays’s Ratcliffe said he raised his target price for American Tower and Crown Castle to $75 and $66, respectively. “We continue to favor tower stocks, even with shares up 20 percent to 35 percent year-to-date.”
Crown Castle reported after the close today that second quarter sales climbed 17 percent to $585.5 million, beating the $561.2 million average analysts’ predictions compiled by Bloomberg. Crown Castle also boosted its yearly forecast.
Revenue at SBA Communications Corp., the third-biggest publicly-traded tower operator, may climb 54 percent from 2011 to $1.07 billion next year, according to analysts’ estimates.
“For the first time since the late 1990s, all the major wireless carriers are engaged in major network upgrades simultaneously, and we are enjoying unprecedented visibility into future revenue growth,” Benjamin Moreland, chief executive officer of Crown Castle, said when the company reported first-quarter earnings in April.
American Tower is scheduled to release results on Aug. 1, with SBA’s figures due the following day.
To grab more of the carriers’ business, the tower companies are taking advantage of favorable borrowing conditions -- low interest rates and access to capital -- to ramp up acquisitions in the U.S. and abroad. The three largest public tower companies spent about $2.4 billion on deals this year, after spending $5 billion in 2011, said Christopher Larsen, an analyst at Piper Jaffray & Co.
“We can see them getting a little bit more aggressive this year,” Larsen said in an interview.
The acquisitions could boost the tower companies’ sales. Last month, when SBA agreed to acquire TowerCo for $1.45 billion, the company said the assets would contribute as much as $95 million to cash flow in 2013.
American Tower and Crown Castle have made bids to acquire about 7,000 towers from T-Mobile USA, people familiar with the negotiations said last month. The assets could sell for about $2 billion, according to Macquarie Capital.
Matt Peterson, a spokesman for American Tower, declined to comment. Crown Castle Chief Financial Officer Jay Brown didn’t return repeated requests for comment. T-Mobile declined to comment in an e-mailed statement.
Other potential acquisition targets include NII Holdings Inc., Kevin Smithen, an analyst at Macquarie, said in a July 9 research note. SBA Communications’ deal for 3,252 TowerCo towers translates to about $445,000 per tower. Smithen estimates that NII Holdings, a carrier that operates in Latin America, has about 1,500 towers at $150,000 each in Mexico, and 4,000 towers at $200,000 apiece in Brazil.
“We feel NII Holdings shares are trading well below the company’s breakup valuation,” Smithen said in the report.
The current stock rally in the tower sector poses some risks for investors. Since last year’s failed takeover of T-Mobile USA by AT&T Inc., there have been very few deals to combine phone companies. Should consolidation moves start again, the value of towers could decline.
“The biggest challenge is the risk of consolidation since four carriers make up the vast majority of the revenue,” said Simon Flannery, an analyst at Morgan Stanley, in an interview. “A major consolidation would likely involve decommissioning of towers.”
For now, though, executives say the proliferation of mobile devices and the need to overhaul wireless networks will keep demand for tower gear buoyant.
“Fundamentally, the demand is going to drive our business for the next five years, at least,” said Alexander Gellman, president of Global Tower Partners, a private company that manages more than 4,000 towers.