Rising interest rates and a merger of two large customers may not outweigh the benefits of FirstNet and commercial wireless network construction that leads to more antenna space being rented on towers.
Seeing pluses and minus for investors to evaluate when they consider putting money into tower company stocks, Jennifer Fritzsche said interest rates, the proposed Sprint and T-Mobile merger, the tower rental rate concessions AT&T Mobility and Verizon Wireless want, continued operating leverage and low maintenance costs, and wireless network construction are on investors’ minds. Fritzsche, a senior telecom analyst with Wells Fargo Securities, spoke at the Connectivity Expo conducted by the Wireless Infrastructure Association on May 22 in a session about the investment outlook for towers and infrastructure. She said on the bullish side, explanations of the tower business given to people new to the business often end with the statement, “I’m not sure there’s a better business model that exists than the towers.”
Possibly rising interest rates are top of mind for investors, Fritzsche said. She said Wells Fargo securities analysts have followed the tower companies since their initial public offerings and during a period of sustained rising rates. Nevertheless, that history alone can’t dictate how to trade shares well now, she said.
If the Sprint and T-Mobile merger goes through, the number of broadband commercial wireless carrier customers for tower companies in most parts of the United States would go from four to three, Fritzsche said.
About possibly lower tower rental rates, Fritzsche said: “Some would say the bears are awake, meaning AT&T and Verizon are angry and feel a sense of injustice toward the tower companies. They feel that they’ve been raked over the coals in terms of pricing, and they are making that feeling known, especially AT&T.”
Positives for the tower companies are their operating leverage and low maintenance capital expense (capex), Fritzsche said. She added that business could grow for the tower companies because of the potential they have to rent antenna space to support the First Responder Network Authority (FirstNet) nationwide public safety broadband network. Additional business will come the way of towers from carriers putting former 600-MHz broadcast spectrum to use. She also said Verizon continues to be extremely steady in spending.
“So the opportunity is there, and we’re at the start of a big spending cycle,” Fritzsche said.
5G Wireless Communications
Fritzsche said that while others think about various exotic applications to support with 5G wireless communications, such as robotic surgery and autonomous cars, she believes others will develop services and businesses that haven’t been mentioned yet in public predictions. She said cost reduction will make additional innovation possible.
A role Fritzsche sees for macro towers is to be the hubs in a hub-and-spoke network configuration.
Stock analysis at Wells Fargo Securities has given Fritzsche insight into growth in the fiber-optic cable operations business. “We follow one of the fiber ditch-diggers, a company called Dycom Industries, literally the hard-hat guys who lay the fiber,” she said. “Verizon’s wired spend with Dycom is up 83 percent year over year. Verizon is busy having people dig ditches for them. Fiber absolutely matters for wireless communications.”
Although Verizon forecast flat capital expense (capex) spending for a while, inside the overall capex figure, the company is increasing wireless capex and decreasing wireline capex, Fritzsche said.
Sprint and T-Mobile Merger
Of the proposed merger of Sprint and T-Mobile, Fritzsche said, “We’ve seen it before, but not really, because this is the first formal announcement we’ve had. We had what I call rehearsal dinners to impending weddings. In 2014, when Masa Son (the chairman of Sprint and chairman of its majority owner, SoftBank) got in front of the Chamber of Commerce and tried to make this happen, it seemed like the FCC basically said, ‘Thanks, but no thanks,’ and they went away. Last November, it sounded like we were close, and but nothing happened. Then we had an announcement on April 29 that the merger has become formal.”
Wells Fargo Securities downgraded its recommendation for Sprint stock when the merger announcement came. Fritzsche said she believes there may be more battle scars from the AT&T and Time Warner merger outcome, and lingering battle scars from the failed AT&T and T-Mobile merger attempt.
“We have a big fight on our hands, from a regulatory standpoint,” she said. “And T-Mobile is almost a victim of its own success.”
Fritzsche said she calls what will result from a Sprint and T-Mobile merger an empty airplane. The combined company will have a lot of unused 2.5-GHz radio-frequency spectrum from Sprint and unused 600-MHz spectrum from T-Mobile.
“Because Sprint was spending so little, a strong case could be made that after the merger, total spending would go up,” Fritzsche said. “And this will not be a pricing-repair story. It will be quite the opposite. And that is going to fuel the fire at AT&T and Verizon. They’re not going to just sit there and play tiddlywinks. They’re going to be reactive. So we have to see how that shakes out.”
The next Connectivity Expo is set for May 20–23 in Orlando, Florida.