Don't Disconnect From Tower Operators

 | Jul 02, 2013 | 10:00 AM EDT
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Investors often go into "freak out" mode. They panic for no reason. If you take a look at cellular tower operators American Tower (AMT) and Crown Castle International (CCI), you'll notice that in early May investors dumped the group on concerns that growth was slowing. But I think the major telecom carriers will keep spending and keep the tower operators growing.

In early May, Barclay's initiated coverage on the wireless tower operators and caused a stir by raising the prospect that carriers' capital expenditures (capex) were slowing. That caused investors to dump the stocks. But I think the wireless carriers are increasing spending on so-called small-cell deployments. In fact, I think small-cell development will accelerate during the second half of 2013 and the first part of 2014.

These minitowers represent a large opportunity for the tower operators. For example, in the U.S. alone, the major carriers will need to build as many as 90,000 new 4G LTE minitowers between 2013 and 2014. While the capital spending outlook looks mixed overall at Verizon (VZ), carriers are still aggressively spending on LTE deployments, more optical gear and network virtualization. Smartphone penetration is driving the deployments as data hungry applications force the carriers to stick a cell tower anywhere there maybe holes in its network. Small towers allow carriers to offer seamless wireless service across the entire network. Nobody wants to see "Can you hear me now?" commercials on TV any longer. To reduce churn, carriers need to have enough towers to provide end-to-end connectivity.

According to Crown Castle, carriers will spend about $31.5 billion in 2014 on LTE deployments. In fact, by 2016, more than 53% of new cars are expected to have wireless connectivity come standard on more and more models. Verizon's LTE footprint covers 89% of the U.S. population. By the end of 2013, it will completely overlap its 3G coverage.

Sprint (S) is deployed in 58 markets and has plans to roll out to as many as 200 by the end of 2013. T-Mobile is also building out the top 200 markets. And AT&T (T) is working hard to cover 300 million people by year-end 2014.

I think both Crown Castle and American Tower can at least get back to their 52-week highs of $81 and $85, respectively. These companies are stable operators and have 10-year lease agreements with their carrier customers. Personally, I wouldn't want to hang up on the wireless tower industry.

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