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Morningstar | American Tower Is the Latest to Confirm a Fantastic Tower Environment; We Plan to Modestly Raise FVE

American Tower reported a strong fourth quarter to finish an excellent year, but it is hardly surprising. Results from its peers indicate that the current U.S. market is hot, and we believe American Tower is the best operator of the bunch. American Tower remains our favorite tower company, both operationally and based on valuation, but after a big recent run in the stock price, it joins the tower group in looking overvalued to us. We will make only minimal changes to our operating projections, but we plan to raise our $150 fair value estimate by around 5% to account for the time value of money and a lower effective tax rate than we previously projected. We think towers are in for an extended cycle of carrier investment in response to rapidly expanding mobile data use and upgrades to next-generation networks, and American Tower's narrow moat positions it to be a prime beneficiary.

The quarter's results were affected by a settlement with Tata in India that resulted in American Tower receiving a cash payment of nearly $350 million in exchange for releasing Tata from contractual obligations. Excluding that one-time item, year-over-year property revenue was up about 4% in the quarter, as the firm continues to be affected by high churn in India, where the country's carriers continue consolidating, as well as currency headwinds. Property gross margin, excluding the Tata payment, was up 20 basis points year over year, while adjusted EBITDA margin dropped by 50 basis points, to 60% in the quarter. We expect margins to expand 200-300 basis points over the next several years due to the high operating leverage the firm realizes from incremental leasing revenue on existing towers. Net of churn, we project incremental revenue on existing towers to drive mid- to high-single-digit growth over the next five years, similar to what the firm has realized for the last several years.

The U.S. segment, which accounts for about half of the firm's total sales, was the standout in the quarter. Organic tenant billings growth, which includes incremental colocation and amendment revenue plus annual rent escalators minus churn, was 8% versus last year's fourth quarter and exceeded 7% for the year, both levels the firm hasn't seen since 2014. According to management, mobile data use in the U.S. has been growing 30%-40% per year in each of the past several years. We expect the trend to persist, and we think carriers have little choice but to continue investing in their networks. We believe American Tower will continue benefiting from the trend, as we project U.S. organic billings growth to remain near 7% throughout our five-year forecast.

We think the most likely impediment to the U.S. growth trajectory is a completion of the T-Mobile merger with Sprint. Each firm currently accounts for about 9% of American Tower's revenue. However, with contracts in place, the firms wouldn't be able to immediately cut their rent payments, and we think American Tower's large international presence mitigates the effects of a T-Mobile-Sprint tie-up long term. When combined with the possibility that the merged firm would have to increase investment in the near term to reconcile the two networks, we don't think American Tower is in jeopardy of severe cuts to our estimates if the deal closes.

International organic billings were down 3% versus last year's fourth quarter and rose less than 2% for the year. Performance continues to be heavily influenced by carrier consolidation in India, which will cause churn to remain very high in 2019. After 2019, the Tata revenue will be completely rolled off, and we expect churn to return to single digits in Asia, bringing that segment back to organic revenue growth after losses over the past two years. By 2020, we think organic international billings growth will match U.S. performance, in the mid- to high single digits.