Divesting High-Risk Assets And Leveraging 5G And AI Demand Will Strengthen Future Earnings

Key Takeaways

• Divesting low-synergy assets and focusing on developed markets should enhance revenue predictability and net margins.
  
• Expansion in 5G infrastructure and data centers is expected to drive strong revenue growth and margin improvements.
  
• Carrier consolidation and macroeconomic challenges threaten growth, while asset sales and FX volatility could negatively impact margins and earnings stability.

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 over 148,000 communications sites and a highly interconnected footprint of U.S.

• American Tower is divesting assets in high-risk or low-synergistic regions, like its South Africa fiber business and its past exit from India, focusing capital on developed markets which should enhance future earnings quality and predictability, positively impacting revenue and net margins.
  
• Leveraging the 5G cycle, the company's tower upgrades and expansions, particularly in the U.S. and Europe, are expected to support increased mobile data demand and network densification, likely driving future revenue growth.
  
• The company is implementing efficiency initiatives and SG&A cost reductions, leading to margin expansion and supporting earnings per share growth.
  
• CoreSite's data center business, with strong demand driven by AI-related needs, is achieving high returns and is expected to continue yielding mid-teens growth, positively impacting revenue and margins.
  
• Strengthening the balance sheet by reducing leverage to meet or exceed targets, providing flexibility for strategic capital allocation such as share buybacks or high-value investments, could enhance earnings per share and shareholder value.

American Tower Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Tower's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.9% today to 31.7% in 3 years time.
• Analysts expect earnings to reach $3.6 billion (and earnings per share of $7.73) by about April 2028, up from $3.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.4x on those 2028 earnings, up from 31.7x today. This future PE is greater than the current PE for the US Specialized REITs industry at 28.6x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

American Tower Future Earnings Per Share Growth

Risks

• Carrier consolidation remains a concern, as it could lead to reduced demand for American Tower's assets and impact organic tenant billings growth, directly affecting revenue.
  
• The company faces foreign exchange (FX) and interest rate volatility, which could alter financial outcomes, impacting net margins and earnings.
  
• Discontinued operations and asset sales, such as the India business and South Africa fiber business, may result in a reduction of revenue streams and adjusted EBITDA.
  
• The forecasted decrease in organic tenant billings growth in the U.S. and Canada suggests potential risks to future revenue growth and earnings stability.
  
• Macroeconomic uncertainties, including potential challenges in securing cost efficiencies and the effective allocation of discretionary capital, could influence net margins and future growth opportunities.

Valuation

• The analysts have a consensus price target of $235.05 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 $250.0, and the most bearish reporting a price target of just $204.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.3 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 37.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of $219.44, the analyst price target of $235.05 is 6.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.