EUR 850.00 For Business Accounts Only

Morningstar | Crown Castle Is Executing Its Plan, but We Remain Skeptical of the Economics

Crown Castle's fourth-quarter results and 2019 guidance were about what we expected. The tower business remains strong and low maintenance, and the fiber business, where the firm is directing most of its attention and spending, is following the course management has laid out since 2017's Lightower acquisition. However, we still struggle to see the economic attraction of Crown's fiber strategy, which led to our no-moat rating. In our view, the required capital spending is immense, and sufficient monetization is too slow to develop. Perhaps one day the bulk of spending will have passed, and the firm will realize significant leverage, but after hearing 2019 guidance, we believe those days remain years away. We don't expect material changes to our $80 fair value estimate, and we currently see shares as overvalued.

Fourth-quarter and full-year organic site rental revenue growth was 5.6%, and Crown projects about 5% growth in 2019. Guidance also implies additional EBITDA margin expansion in 2019 after a nearly 100 basis point rise, to about 58%, in 2018, in line with our expectation that margins will expand annually as new tenants drive operating leverage.

Management also expects roughly $2 billion in growth capital spending in 2019, the bulk of which is attributable to the fiber segment. However, it still expects to bring on line only 10,000-15,000 small cells in 2019 (although that is an increase from recent years, it is consistent with what the firm has previously indicated). We don't expect management will have any difficulty finding small cell tenants, and we model 15,000 small cells added annually through 2028. However, we project such a pace to result in only about 8% segment growth over the next three years. Though we expect capital spending to come down significantly (from 35% of sales in 2019 to under 20% by 2025) as incremental small cell revenue increasingly comes from colocated rather than anchor tenants, we don't expect strong returns on investment.

Crown's towers continue to chug along and perform well. Sales grew nearly 7% year over year in the quarter and over 7% in 2018. Management noted that it saw increased activity in the second half of 2018, which it expects to carry on into 2019. We think increased FirstNet spending by AT&T and some spectrum deployment by Dish Network is contributing to the boost. Towers gross margin expanded nearly 200 basis points to almost 73%. Despite still accounting for about 70% of total company revenue, we don't expect towers to be a growth focus. We expect the firm will continue to allocate about 12% of tower sales to capital spending, as it did again in the quarter and the year, and grow organic revenue 5%-6% annually. We maintain that the tower business is a good one and that towers will continue to be vital, even as small cells become increasingly prevalent, as towers are much more cost efficient for tenants.