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Morningstar | American Tower Posts Another Excellent Quarter, but Shares Starting to Look Rich; FVE to $150

With continued U.S. strength and greater visibility into the effects of massive carrier consolidation in India, narrow-moat American Tower's third-quarter results provided much reason for optimism. American Tower remains our favorite of the three big U.S. tower companies, but after a jump in its stock price after earnings, it has joined Crown Castle and SBA in looking expensive at current levels. We are raising our fair value estimate to $150 per share from $147 to account for the time value of money and slightly better near-term U.S. results than we previously forecast. This is the tower name we'd be most interested in if the market presented an opportunity.

Year-over-year revenue growth of over 6% was in line with our expectation and is tracking the nearly 7% growth we forecast for the year, but the adjusted EBITDA margin of almost 61.3% was nearly 200 basis points higher than we projected and leaves the firm poised to exceed our 60% 2018 forecast.

The United States, which accounts for over 50% of consolidated revenue and almost two thirds of operating profit, was the biggest source of strength. Organic tenant billings growth was almost 7.5% for the second straight quarter, as carrier spending remains robust. Although we are not forecasting organic U.S. growth to remain quite that high (we are maintaining our 7% annual growth forecast through 2022), we expect the favorable environment to continue, as we think carriers will have no choice but to continue deploying more equipment as consumers use more mobile data. Unsurprisingly, given the high amount of operating leverage we see in towers, the higher level of amendment activity dropped straight to the bottom line and U.S. operating margins were about 50 basis points higher than we projected.

International organic tenant billing growth was 2%, with the result again being weighed down by very high Indian churn numbers, which were universally expected due to carrier consolidation in that market. Normalized for that churn, organic growth would have been about 8%. Excluding the excess Indian churn that we expect to remain elevated for the next couple of years, we think high-single-digit to low-double-digit international growth is sustainable over the next several years, as we think network upgrades in places like India, Mexico, and Africa will drive high levels of carrier spending.

Churn in India has been a headwind for some time, but we finally got a bit of clarity. The firm announced it has come to an agreement with Tata, which will lead to most of Tata's business churning off immediately in exchange for a $320 million settlement agreement. The cash will come in in the fourth quarter, but we expect near-term churn in India will now be much higher than previously expected, at 25%-30% through 2019. Despite the heavier near-term churn, we think American Tower benefits from added certainty. We were previously somewhat in the dark as to when outsize Indian churn levels would finally moderate. We now think that by 2021, churn can come down to more normalized levels, which we see as good news. We think the clarity it brings is well worth it for the stock, and the $320 million helps to mitigate the effect.