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Morningstar | Unprecedented U.S. Strength Again Drives American Tower to a Fantastic Quarter, but It's Priced In

Already high levels of U.S. carrier spending at American Tower accelerated in the first quarter, driving the firm to pace ahead of our full-year revenue and EBITDA forecasts. We think American Tower is a best-in-class operator in a very attractive industry--we believe macro towers, protected by switching cost and efficient scale advantages, will continue to be crucial with ever-growing mobile data use, hence our narrow moat rating. However, we think the stock has gotten ahead of itself after a tremendous run. We're raising our $156 fair value estimate to $160 to account for the time value of money and an increase to our 2019 numbers, but we don't believe the recent level of U.S. carrier activity is sustainable long term, despite the need for further network upgrades. If that's correct, we can't justify the current valuation. Still, we see American Tower shares as more attractively priced than its peers, and it's the first stock in the group we'd look to on a pullback.

New spending (through colocation and amendments) on existing U.S. towers, which comprise half the firm's total revenue, contributed 6.5% revenue growth during the quarter, breaking the record set last quarter. After accounting for churn and escalators, revenue growth on existing towers exceeded 8%. The big four U.S. carriers accounted for 85%-90% of that growth. We think they will still have significant network enhancements to deploy after 2019, but we don't suspect they'll continue to have such favorable conditions that allow for spending to increase at a similar rate. Long term, we estimate new spending will contribute 4%-5% revenue growth annually, leaving growth from existing towers at 7%-8% annually. We don't expect significant amounts of new tower building in the mature U.S. market.

Asia was again the highlight of the international segments. American Tower continues to work through churn resulting from carrier consolidation in India and its agreement with Tata that allowed Tata to immediately remove all equipment for a one-time payment last quarter. As expected, Indian churn was very high (40%), leading to a 10% decline in total tenant billings, which pulled down companywide results. However, new spending on existing towers in Asia contributed 10% sales growth on last year's tower revenue base--the best quarter in nearly two years even as it was more than offset by churn--and the firm added over 500 new towers. We think the prospects in India are bright once the firm gets past the effects of consolidation-related churn, which should be largely finished by the end of 2019.

In other international markets, management mentioned that Mexico and Brazil are strong. Revenue growth on existing Latin American towers was just under 8%. EMEA remains the weakest link, but revenue there still grew 6.5% on existing towers. We expect the growth was driven by Africa, while Europe dragged it down. We think Africa, like India and some Latin American countries, remain excellent growth opportunities for American Tower long term and provide good diversification in case the U.S. slows. We think the need and opportunity for network expansion is far greater in those countries than in the more developed markets of the U.S. and Europe.

Overall, the firm's total property revenue growth was 4.4% year over year. With a more normalized Indian churn level, we estimate it would have exceeded 8%. Adjusted EBITDA margin expanded by 50 basis points from last year's first quarter, and at 60.5%, it matched our full-year projection. We think there is room for greater expansion in future years, as the costs on existing towers are largely fixed, resulting in almost pure profits on colocation and amendments. We forecast EBITDA margin to expand 300-400 basis points by 2023.