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Morningstar | U.S. Strength Drives American Tower 2Q Results and Should Persist; FVE to $147 from $145

American Tower's U.S. results provided the highlights of the second quarter, but the narrow-moat firm is seeing high levels of carrier spending across most markets as carriers move to keep up with surging mobile data demand globally. The favorable business environment more than offset expected weakness in India, where wireless service provider consolidation continues, and currency headwinds, which resulted in American Tower slightly reducing its full-year property revenue outlook. In all, this quarter's revenue growth of 7.1% and EBITDA margin of 61% were about what we projected and consistent with our full-year forecasts of 7.5% and 61%, respectively. Our investment thesis already largely rests on the explosion of worldwide mobile data demand, which drives our average consolidated revenue growth forecast of more than 8% annually for the next five years, so we are not making material changes to our model. We are raising our fair value estimate to $147 per share from $145 to reflect the time value of money, but with the stock popping on earnings, we no longer see the shares as undervalued. Still, American Tower remains our favorite name in the tower space and would be our choice on a pullback.

The U.S. market, which accounts for more than half of American Tower's revenue, is stronger than we expected. Like rival SBA, American Tower noted that it is seeing material investments from all four U.S. operators, which resulted in second-quarter organic tenant billings growth of 7.4%. Moreover, the investment is primarily due to amendments and 4G-related, which leads us to believe carrier spending will have to continue in coming years as they embark on 5G spending and densify their networks. While encouraging, we were already modeling higher than 6% average annual organic U.S. tenant billings growth through 2022, so we don't see major upside from this news. We also remain aware that approval of the Sprint-T-Mobile merger would affect spending from those carriers.

American Tower has long telegraphed that its Indian business would be challenged in the near term due to consolidation in that market, and its results reflect that. Organic tenant billings growth in Asia fell 10% on the back of 18% churn, and the segment was the only operating weakness we saw in the report. Management remains optimistic about the market and expects 2018 to be the peak year for churn. Even so, we think churn will remain elevated for several years, and we expect Asia to be the company's weakest segment through 2022. We are concerned about the level of weakness in India and think it could result in Asian projections having to come down in the medium term.

Latin America and Europe, Middle East, and Africa remained strong during the quarter, posting 12.4% and 6.8% organic tenant billings growth, respectively. While this quarter's results were a bit ahead of our long-term averages, we expect such numbers to be pretty typical over the next five years, as many of those markets continue to develop. We expect Brazil and Mexico to be particular bright spots for American Tower.