Buy the towercos, instead of the telecoms? Growing mobile demand and rollouts of 5G could make the business models of independent tower companies an attractive draw.
Simon Flannery Equity Analyst, North American Telecom Services and Communications Infrastructure
Demand for mobile data is booming, as more people connect to more devices that require greater speed and bandwidth.
Cellular towers, while hardly glamorous, are the backbone behind these connections—and the rollout of 5G mobile internet connectivity will make them all the more indispensable. Meanwhile, the business models of these independent tower companies, or towercos, are tough to beat, given high barriers to entry, low operating costs and pricing power.
Our team recently compared every major cell-tower market in the world to identify regional differences and pinpoint our global top picks. Out of the 11 names we cover globally, we rate four stocks as Overweight.
Put simply, we believe one of the best ways to leverage global data growth and 5G build-outs may be a focus on the towercos, not the telecoms. We expect global towercos to grow both site-leasing revenue and earnings at roughly a compound annual rate of 9% over the next three years.
However, given the rich multiples in some markets, including the U.S., investors will want to be selective. As such, our team recently compared every major cell-tower market in the world to identify regional differences and pinpoint our global top picks. Out of the 11 names we cover globally, we rate four stocks as Overweight, five as Equal-weight and two as Underweight. (For more information, ask your Morgan Stanley Representative or Financial Advisor for the recent report,Global Towers: 5G and Tower Monetization Driving Value Creation.)
A Booming Business
In the early days of cellphones, the telecommunication companies built and operated their own towers. While many still do, a growing share of the business is going to towercos, which primarily generate revenue by leasing space on their communication sites to wireless carriers and other tenants. Lease contracts vary, based on such factors as tower location and capacity, and space, weight and position on the equipment.
Because towercos can host multiple carriers, they have an operational edge over telecom-owned towers: Increasing the number of tenants per site also boosts margins and returns. In fact, incremental gross margins from an additional tenant can be more than 90%.
Building new towers requires navigating local zoning laws and potential pushback from the public, but this initial hurdle ultimately serves as a competitive moat. Once up and running, towers typically garner long-term contracts, high renewal rates and, in many markets, lease-rate escalators to the tune of 3% annually.
Outlook Improves With 5G
Meanwhile, the rollout of 5G only adds to demand for infrastructure. Although 5G networks will include small cells and distributed antenna systems (DAS), macro towers form the periphery of these networks.
South Korea provides a good early example of how 5G can amplify data usage growth. Since the commercial launch of 5G in early April, that market has seen average data usage per month more than double, even triple, for subscribers moving from 4G to 5G—roughly 4.5 million as of the end of 2019.
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