Author: SM Investor

In the past three months, Crown Castle (NYSE:CCI) stock price decreased by about 25%, making CCI attractive at prices of around $110 per share. The company’s guidance indicates that CCI’s AFFO per share in 2023 can be higher than in 2022. Also, based on the company’s dividend history, CCI has been able to increase its quarterly dividends continuously. High interest rates, and T-Mobile (TMUS) and Sprint consolidation can negatively affect CCI’s financial results in the upcoming quarters. However, the increasing demand for communication services and three big customers that can expand their operations and increase their market share in the following years can completely offset the mentioned negative effects in the long term. The stock is a buy.

Financial results

In its first quarter of 2023, the company reported site rental revenues of $1624 million, up 3% YoY. CCI reported a 1Q 2023 AFFO and AFFO per share of $828 million (up 2% YoY), and $1.91 (up 2% YoY), respectively. During the first quarter of 2023, CCI paid stock dividends of $1.565 per common share, up 6.5% YoY. “We continue to benefit from the growth in demand for connectivity and the development of 5G, resulting in positive operating trends and first-quarter growth that was in line with our expectations,” the CEO commented.

Due to the increasing demand for connectivity, the demand for CCI’s towers, small cells, and fiber can increase continuously. Thus, the company expects its full-year 2023 AFFO and AFFO per share to be higher than in full-year 2022. “I believe the continued demand for our 40,000 towers combined with an increasing need from our customers for small cell deployments across our 85,000 route miles of fiber will support our ability to deliver compelling risk-adjusted returns through a combination of dividends and growth,” the CEO explained. In the full-year 2022, CCI’s site rental revenues were $6289 million. In 2023, CCI expects its site rental revenues to be between $6488 million to $6533 million. The company’s AFFO per share in 2022 was $7.38. According to CCI’s expectations, its full-year 2023 AFF per share can be between $7.58 to 7.68 per share. It is worth noting that in 2023, everything is not in favor of CCI. Higher interest rates and Sprint cancellations, negatively affect CCI’s ability to pay higher dividends. However, the strong market outlook may affect positively CCI’s operating trends across its business in a significant way, completely offset (or at least partly offset) the negative impact of higher interest rates and Sprint cancellations.

The market outlook

CCI has more than 40 thousand towers, about 120 thousand small cells, and about 85 thousand route miles of fiber. The company’s towers provide the critical foundation for coverage. Its slam cells enable additional network densification by offloading traffic and bolstering capacity in the areas of the network where data demand is the greatest. Finally, CCI’s 85 thousand route miles of fiber increase the return on fiber investments by sharing the same fiber assets across thousands of fiber solutions customers. In the past 10 years, through $7 billion of internal financing (cash flow from operations) and $22 billion of external financing, CCI allocated $10 billion to tower developments and acquisitions, and $18 billion to fiber developments and acquisitions. These capital allocations show that the company expects the market size of wireless connectivity in the United States to grow at a fast pace. According to GSMA Mobile Economy and World Bank, North America accounts for more than 30% of the expected global wireless capex through 2025.

Ericsson’s 2022 Mobility report shows that in North America, the mobile data traffic per smartphone is expected to increase from 17.4 GB per month in 2022 to 55.0 GB per month in 2028, representing a CAGR of 21% (see Figure 1). The significant increase in data consumption means that the market outlook for towers and small cells is very strong. A company’s potential to benefit from the mentioned market condition depends on its customers. Overall, without a long-lasting relationship and agreement with suitable customers that can expand their operations as the demand increases, CCI would not be able to increase its cash flow from operations and pay higher dividends as one can expect. The good news is that CCI’s customers are among those who have the ability to increase their market shares in the following years and improve their competitiveness. According to Figure 2, T-Mobile, AT&T (T), and Verizon (VZ), are CCI’s top 3 biggest customers, representing 38%, 18%, and 19% of CCI’s LQA site rental revenues in the first quarter of 2023. Weighted by site rental revenues and excluding renewals at tenants’ option, T-Mobile, AT&T, and Verizon’s current term remaining is 8 years, 4 years, and 8 years, respectively. CCI re-negotiates with its tenants over time on its towers. The re-negotiating processes have leas to long-term relationships with tenants, resulting in a retention rate of between 98% to 99% each year.

Figure 1 – Mobile data traffic per smartphone (GB per month)

Figure 2 – CCI’s consolidate tenant overview

Customers: Potential and risks

According to comparably.com, among telecommunications companies, in terms of product quality score, Verizon, T-Mobile, and AT&T rank second, third, and fourth, respectively. Also, in terms of net promoter score, Verizon, T-Mobile, and AT&T rank first, third, and fourth, respectively. In terms of pricing score, Verizon, T-Mobile, and AT&T rank second, third, and fourth, respectively. In terms of customer service, Verizon, T-Mobile, and AT&T rank first, third, and fourth, respectively (see Figure 3). We can see that CCI’s main customers are among the most competitive companies in the telecommunications industry. Thus, they can expand their operations as the demand for their services increases, implying that CCI might be able to renew its tower contracts as they expire on favorable terms, as it did so in the past.

Figure 3 – CCI’s main customers competitiveness

Yes! CCI’s main customers are very big, meaning that CCI’s cash generation potential can increase as its customers may be able to expand their operations in the following years. Three big customers mean that the current contracts can be amended favorably and renewed. Three big customers mean that to benefit from the expanding market, CCI just has to increase its relationships with its current customers; customers that have the potential to expand their operations based on the market outlook. This is something that all of the CCI’s competitors may not be able to do. However, the risks of concentrated customers should not be ignored in your investment decisions. The loss, and financial instability of T-Mobile, AT&T, and Verizon may materially decrease CCI’s communications infrastructure and services, resulting in lower cash flow from operations and lower dividends. Also, the loss of each one of these big customers confronts CCI with serious liquidity risks. On January 2022, CCI entered into an agreement with T-Mobile that contemplates T-Mobile and Sprint network consolidation. This consolidation has a negative effect on CCI’s site rental revenues in 2023, 2024, and 2025. Due to network consolidation, non-renewals, and high interest rates, the company expects its annual dividend per share growth through 2025 to be below its long-term annual target.

Summary

The market outlook is strong and as CCI has big customers with high competitiveness in the telecommunications industry, its cash flow generation potential can improve in the following years. However, some risks should be considered. High interest rates and reliability in just a few customers may prevent CCI to achieve its long-term goals. However, at prices around $110 per share, which is the lowest in the past 4 years, the stock is a buy.