March 8, 2016 — After taking the temperature of the private tower companies, as well as the public towercos, Wells Fargo made the bold move last week to downgrade the tower sector.
“We believe the industry is facing some growing pains right now in the U.S. Will it pass? Yes, we believe so. But will the stocks outperform in this period of growing pains? Probably not,” wrote Jennifer Fritzsche, Wells Fargo senior analyst.
One thing that is working against towers is the current lull between the deployment of fourth generation and fifth generation wireless technologies, according to Wells Fargo.
“At the heart of it, we believe the carriers are pushing back and new incremental growth will be harder from here as we wait for the spectrum auctions, FirstNet, and 5G decisions and standards to all get sorted out,” Fritzsche said. “There is typically a pause in spending as carriers transition between different technologies (i.e.: 2G, 3G, 4G, etc.).”
Another component that may be working against towers is pricing pressures from the carriers, which are spending billions of dollars for spectrum, fiber and network upgrades at the core but seeing ARPUs fall.
“Carriers definitely appear to be pushing back on the structure of amendments and pricing of its tower contracts,” she wrote. “One may even suggest that the carriers enjoy working more with the smaller portfolios. Carriers’ wireless pricing and ARPU are being pressured, demands on the network are higher than ever, and many unknowns remain about their capital decisions (how much will spectrum cost?).”
In particular, Wells Fargo downgrading shares of SBA Communications to Market Perform from Outperform, lowering its valuation range to $95-100 from $110-112.
“Our downgrade is primarily a call on valuation, and supported by another round of tower checks that confirm Big 4 U.S. carrier signed leasing activity has slowed,” Fritzsche wrote. “We believe the lower organic growth outlook in the United States, as well as FX [foreign exchange] headwinds from its Brazil exposure, and higher leverage versus its peers, will keep a cap on the stock near term.”
While SBA has noted an increase in its leasing pipeline, namely applications by AT&T for WCS, AWS-3 spectrum, the expected six to nine-month lag will push the impact on the tower industry out to 2017.
The same week that Wells Fargo published the downgrade, eDigest got a call from a site acquisition professional located in Georgia that is closing its doors because of a lack of work. The man, who asked that is name not be used, said at the beginning of 2015 work started to slow up for his firm and came to a halt last summer.
“I have been talking to friends at other site acquisition companies across the country that are closing down because there is no work,” he said. “When I hear that I figured this is something much bigger than my company.”
He cited a lack of work from both AT&T and Verizon for the current downturn but held out hope that Sprint/Mobilitie would provide some work in the future.
Site Acq Firm Sees Success Through Diversification
Business is pretty good for one company that has diversified beyond the cellular carriers. Mitchell J Architecture, which has been doing telecom site acquisition for six years, has been busy with its contract to do site acquisition and architectural services for the LA-RICS first responder network. The firm completed more than 350 public safety projects in 2015.
“The last year was the best year ever for us,” Bodie Campagna, a principal with Mitchell J Architecture, told eDigest.
Mitchell J Architecture depended on the carriers for about 20 to 25 percent of its revenues in the last year with projects for AT&T and Verizon as a subcontractor and small cells directly for Sprint/Mobility. It also had a generator project for AT&T that it fulfilled through General Dynamics. The firm is looking for work with GoGo air-to-ground, as well as diversifying into projects beyond telecom.
Is there hope for towers supporting cellular carriers in the long run? Fritzsche said she was heartened by confidence shown by Fran Shammo, Verizon CFO, during an earnings call, when he said that macro cells still have an important role in delivering data to small cells.
“So as far as building and creating new towers, that’s at a much slower rate, but the importance of the tower is still there,” he said.