5G Upgrades And Data Center Expansion Will Support Leasing Activity

Key Takeaways

• 5G infrastructure rollout and data center expansion to drive leasing activity, boosting revenue and returns.
  
• Cost optimization and strategic capital allocation enhance margin growth and earnings predictability, increasing shareholder returns.
  
• Economic uncertainties, market volatility, and refinancing risks could challenge revenue growth and profitability, impacting financial flexibility and strategic M&A opportunities.

Catalysts

American Tower, one of the largest global REITs, is a leading independent owner, operator and developer of multitenant communications real estate with a portfolio of nearly 149,000 communications sites and a highly interconnected footprint of U.S.

• The rollout and enhancement of 5G infrastructure by U.S. carriers, with aggressive plans to complete upgrades by the end of 2026, is expected to drive significant leasing activity, thus positively impacting property revenue and adjusted EBITDA.
  
• The expansion of CoreSite with new data centers and strong leasing demand is set to support revenue growth and deliver high returns, contributing to improved earnings.
  
• Globalization initiatives and cost optimization efforts, including SG&A reductions and operational efficiencies, are expected to drive net margin expansion and long-term AFFO growth.
  
• Capital allocation strategies focusing on developed markets and divesting non-core assets, such as the South African fiber business, aim to enhance portfolio quality and predictability of earnings, thus boosting shareholder returns.
  
• A strong balance sheet with reduced leverage and low floating rate debt increases financial flexibility and positions American Tower for improved earnings stability and potential EPS growth through strategic investments.

American Tower Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Tower's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.4% today to 30.8% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $7.95) by about August 2028, up from $2.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.6x on those 2028 earnings, up from 38.2x today. This future PE is greater than the current PE for the US Specialized REITs industry at 28.3x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

American Tower Future Earnings Per Share Growth

Risks

• The global economic backdrop and potential FX implications may pose risks, as emerging markets could be more susceptible to external economic shocks, affecting revenue and earnings.
  
• Interest rate fluctuations and refinancing risks could impact the company's financial flexibility and cost structure, potentially affecting net margins and earnings.
  
• Ongoing churn in Latin America, particularly from Oi, could dampen organic tenant billings growth and overall revenue from this region.
  
• Uncertainty surrounding U.S. and international macroeconomic conditions, such as potential inflationary pressures and tariff impacts, could create volatility in future financial results and affect profitability.
  
• Volatility in the global markets, particularly affecting the developed markets like Europe, could create challenges in identifying and executing beneficial M&A opportunities, which are essential for revenue growth and portfolio expansion.

Valuation

• The analysts have a consensus price target of $249.0 for American Tower based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $281.0, and the most bearish reporting a price target of just $217.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.0 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 39.6x, assuming you use a discount rate of 7.6%.
• Given the current share price of $204.15, the analyst price target of $249.0 is 18.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.