Why You Shouldn't Look At SBA Communications Corporation's (NASDAQ:SBAC) Bottom Line

SBA Communications Corporation is a US$27b large-cap, real estate investment trust (REIT) based in Boca Raton, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how SBAC’s business operates and also how we should analyse its stock. Below, I'll look at a few important metrics to keep in mind as part of your research on SBAC.

See our latest analysis for SBA Communications

Funds from Operations (FFO) is a higher quality measure of SBAC's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For SBAC, its FFO of US$851m makes up 61% of its gross profit, which means the majority of its earnings are high-quality and recurring.

SBAC's financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky SBAC is, broadly speaking, to have debt on its books. The metric I'll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 8.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SBAC 12 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

Next, interest coverage ratio shows how many times SBAC’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 2.13x, SBAC is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

I also use FFO to look at SBAC's valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. SBAC's price-to-FFO is 31.17x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

SBA Communications can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I've only covered one metric in this article, the FFO, which is by no means comprehensive. I'd strongly recommend continuing your research on the following areas I believe are key fundamentals for SBAC:

1. Future Outlook: What are well-informed industry analysts predicting for SBAC’s future growth? Take a look at our free research report of analyst consensus for SBAC’s outlook.
2. Valuation: What is SBAC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SBAC is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.