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Morningstar | We’re Not Convinced Crown’s Heavy Fiber Spending Will Prove Worthwhile

Crown Castle's strategy has deviated from its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown now operates exclusively in the U.S. and is aggressively investing in fiber to pursue small-cell communications sites. In our view, Crown Castle has adopted a high-risk strategy. While we acknowledge the potential upside of its fiber investments, they require heavy initial investment and lack the competitive advantage that Crown has with its towers.We like Crown’s legacy tower business (70% of total revenue in 2018), where it leases space on its towers to wireless carriers, who install antennas and other equipment. The carriers enter long-term leases with Crown that include rent escalators (annual increases of about 3%), giving the business a highly visible and stable revenue stream. Towers are also the beneficiaries of the explosion in mobile data use, which has been growing 30%-40% per year in the U.S. To meet the demand, carriers either locate equipment on additional towers or add or modify equipment on existing towers. Significant operating leverage makes both alternatives highly profitable for Crown—additional tenants and equipment upgrades can both be added to towers for very little incremental cost. We think towers will continue to be an integral part of the long-term mobile network solution.Crown is transitioning to become less reliant on its tower business by acquiring fiber (it now owns 65,000 route miles) and setting up small cells on it. We see this as a response to the growth in consumers’ data use and a pending evolution in network infrastructure, which may be necessary as the U.S. moves to 5G networks. However, we think Crown faces challenges with its fiber that will keep returns on invested capital depressed for several years. Crown is limited in how quickly it can set up small cells, leaving an extended period before we think it can fully monetize its fiber. We estimate Crown can only build about 15,000 cells per year. We are also concerned with the very high capital expenditures associated with the small cell buildout and think competition will constrain pricing power.