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Morningstar | Strong 3Q From SBA Communications Is No Surprise; Stock Remains Overvalued at Our $133 FVE

Narrow-moat SBA Communications confirmed the strength we've been seeing across the tower space, driven primarily by U.S. carriers that have been spending at high levels to keep pace with fast-growing mobile data use by consumers. While we find no faults in a quarter that saw accelerating organic revenue growth and margin expansion in both segments, and we believe management is executing very well, the company is simply achieving what we expect given the secular trends in the industry. We are not making any substantial changes to our long-term forecast, and we we are maintaining our $133 fair value estimate. Despite the strength in the business, we see the firm as overvalued at current levels.

In the U.S., SBA posted 5% organic revenue growth--its best quarter since 2015--despite churn levels remaining elevated while Metro, Leap, and Clearwire contracts roll off. We expect churn to normalize by 2020 and for the firm to maintain a similar level of gross organic revenue growth as it produced this quarter (7%) for the next several years, so we project organic revenue growth of at least 6% annually from 2020-2022. Currently, all four major U.S. carriers are spending heavily to improve their networks, and churn among those firms is miniscule (30 basis points this quarter). We expect the environment to persist over the next few years, but we don't see it materially accelerating from here, as we don't think conditions could be much more favorable for carrier spending.

Leasing strength brought strong margins both domestically and internationally and led to an adjusted EBITDA margin of 71%, higher than any quarter over the last decade. Given the high amount of operating leverage we see in this industry, we expect the trend to continue. Our forecast calls for adjusted EBITDA margin to expand almost 300 basis points by 2022 from the 70.7% we project for 2018.

Leasing activity was also very strong internationally, with a similar atmosphere of heavy carrier spending, especially in Brazil, which grew over 12% on an organic, constant currency basis. Organic revenue growth for the overall segment exceeded 10%, net of churn that remained steady below 1%. The only weakness we saw internationally was greater currency headwinds than management anticipated, which slashed 17 percentage points from cash revenue growth (versus the 10-point headwind we expected), almost entirely due to the Brazilian real. Total cash revenue growth was still 5%, and management is optimistic that currency headwinds will moderate now that the Brazilian election has passed. The 10% annual organic revenue growth rate that we project from 2019-2022 is currency neutral.