One of the Best Stocks to Own for Growth and Income

Jay Peroni's picture

Tuesday, January 8, 2013 - 1:00pm

by Jay Peroni

The mobile market is huge. And in the past few years, it has been growing exponentially across the globe. Mobile technology is constantly reshaping how we interact in our daily lives. From smartphones to tablet computers, can you think of anyone who doesn't own one of these mobile devices?

There's no question we are a connected world: There are now an estimated 6 billion mobile subscribers worldwide, according to DigitalBuzz.

Consumers aren't just texting anymore, they're using mobile devices for bank transactions, shopping and a growing list of other uses. The demand for these services is exploding each year and along with it is the need for more cellphone towers.

This is where a huge investment opportunity lies.

Tower companies make money owning wireless broadcast towers and leasing them to telecommunication operators on long-term contracts that escalate in price by about 3-5% annually. In other words, owning a telecom tower is equivalent of owning real estate.

One of my favorite types of investments is real estate, especially real estate investment trusts (REITs). REITs offer investors an opportunity to gain access to a real estate portfolio without the headache of being a landlord. They typically include high-quality commercial properties, ranging from apartment buildings and office complexes, to health care facilities and shopping malls. Because REITs have no investment minimums, they allow large and small investors an easy way to participate in commercial real estate.

The best part: REITs must pay out 90% of its operating profits as dividends in order to be exempt from having to pay corporate income taxes. As a result, most REITs pay frothy dividends. With so many REITs available, I love the ones that focus on niche markets like cellphones.

One of the best opportunities in this space is American Tower (NYSE: AMT). It is the largest independent operator of wireless and broadcast communication sites. The company operates roughly 50,000 tower sites in the United States, Latin America, India and Africa. American Tower's largest customers are wireless carriers, including AT&T (NYSE: T), Sprint Nextel (NYSE: S), Verizon (NYSE: VZ) and T-Mobile USA (a division of Deutsche Telekom (OTC: DTEGY)).

Although these tower owners operate in the same environment, American Tower's 39.4% operating margin trumps competitors like Crown Castle (NYSE: CCI) (-19.9%) and SBA Communications (Nasdaq: SBAC) (-29.3%). It also has higher revenue per tower, along with less exposure to weaker-margin network-development segments.

This stock has been on fire since 2009 and I don't see it slowing down. Take a look at the chart below.

Why American Tower
The third quarter of 2012 was another solid period for American Tower as it reported improved margins and another upward revision of expected earnings. Year-over-year revenue increased 13.2% to $713.3 million, while growth continues to be fueled from its international expansion. 

American Tower's three biggest revenue drivers continue to be Latin America, India and South Africa. This group reported more than 40% core revenue growth, along with same-tower growth of 8.4%. What impresses me is the fact that more than 90% of its new international business is in the form of new leases rather than investments.

This has been one of the main reasons American Tower has delivered 35% annualized returns for its shareholders in the past 10 years. Last quarter, the REIT built 580 international sites and acquired another 850, adding more than 12,000 international communication sites to its already sizeable portfolio.

One look at the competition in this space and American Tower is clearly the leader of the pack. A quick look at the table below, and it's easy to see American Tower has superior margins, a more diversified business model, relatively low leverage and a more attractive price-to-earnings (P/E) ratio.

Risks to consider: American Tower faces the same risk as any tower company as changes in consumer demand for wireless services, next-generation technology deployments, or zoning and environmental regulations can all affect the firm's profitability. It also has a large exposure to emerging markets, which boosts its growth profile but also adds risk and uncertainty. Another concern is that more than half of its tower revenue is driven from the four largest U.S. carriers. If there is a major disruption in spending for any one of these four clients, then it could negatively affect revenue and thus profitability. That being said, American Tower is still well positioned to continue dominating its market.

Action to Take --> This stock is a great combination of growth and income. Buy American Tower up to $80 a share. It is currently trading around $76 and could easily hit $100 a share within the next 12 months. This one yields a small 1.2%, but has a lot of growth potential as it expands across the globe. American Tower also has the longest contracts in the sector, giving the stock lots of visibility and less day-to-day volatility, compared to competitors.

Jay Peroni does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of T, VZ in one or more of its “real money” portfolios.