Morningstar | Crown Castle's Solid Q2 and Guidance Track Our Forecast; Our Long-Term Concerns Remain; FVE to $80
Crown Castle reported an excellent second quarter and raised full-year guidance, with its performance benefiting from last year's Lightower acquisition. While this quarter's results slightly exceeded our expectations, our full-year 2018 forecast was already consistent with the company's newly enhanced outlook. Despite our bearish valuation, we have never questioned the firm's ability to meet its near-term targets or find demand for the small cells it provides on its fiber. Rather, we are concerned with the cost to acquire and build fiber infrastructure and set up small cell nodes; the pace with which the firm can monetize its sizable fiber assets; and the extent to which small cell tenants will be co-locating on already built-out fiber. Those concerns lead us to question whether Crown Castle can sustainably out-earn its cost of capital, thus our no-moat rating. On the positive side, based on fiber revenue results over the last two quarters, we think Crown has more pricing power on small cells than we previously anticipated. Consequently, we expect to raise our fair value estimate to $80 from $77, but we still see shares as overvalued.Organic site rental revenue grew 5.6% year over year in the second quarter, slightly ahead of the 4.8% growth we had been projecting for 2018. While the company does not break out organic growth by segment, we estimate that tower organic revenue growth was just under 5%, a bit below the nearly 6% we project for the full year. We see towers as a steady business that should grow revenue at a similar rate over the next decade. The fiber segment remains the most interesting and controversial in our eyes, and we estimate organic fiber revenue grew roughly 10% in the quarter. While 10% is good, we view it as typical while the company continues to invest in and build out its fiber business. We now project fiber revenue to average nearly 12% annual growth between 2019 and 2027 (up close to 200 basis points from our previous forecast).
Adjusted EBITDA is tracking slightly below our full-year forecast. Through two quarters, it is at about 58% for the year, while our full-year projection exceeds 59%. We are not placing much importance on this seeming weakness, as numerous anomalies can affect the firm's adjusted EBITDA calculation. Regarding profitability, we are most interested in the segment site rental gross margins and segment operating margins. Both metrics are in line with our full-year expectations, at about 70% and 58%, respectively, with each segment tracking our full-year forecast.
Crown Castle International is a holding company. Through its subsidiaries, the company owns, operates and leases shared communications infrastructure that is geographically dispersed throughout the U.S., including towers and other structures, such as rooftops (collectively, towers), and fiber primarily supporting small cell networks (small cells) and fiber solutions. The company's towers, fiber and small cells assets are collectively referred to herein as communications infrastructure. The company's core business is providing access, including space or capacity, to its shared communications infrastructure via long-term contracts in various forms, including lease, license, sublease and service agreements.
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