The following company update report is writtern by David W. Barden, CFA of BofA Merrill Lynch Global Research
American Tower Corp. – BUY – PO US$95.00
Focus on existing markets for incremental M&A and margin
- We were pleased to host American Tower at investor meeting in the Asia Pacific region.
- We reiterate our Buy rating on continued strong fundamentals leading to premium growth.
- Among key nuggets from our trip was the company’s plan to focus on existing markets for expansion which can boost margins.
Investor meeting takeaways
BofA-ML was pleased to host American Tower for a week of investor meetings last week in the Asia-Pacific region. Topics discussed included basic business mechanics, the fundamental demand environment, M&A and AMT’s view of international markets, the potential impact of US wireless industry consolidation and other risks to the expected growth opportunity.
A focus on scaling up in existing markets to boost margins
Among the most interesting nuggets from the trip was the assertion that AMT’s most recent deals expanding into existing market footprints added just 2.5% incremental SG&A vs. the 8% it has currently across its portfolio. This 5.5% delta on revenue is a solid data point to help evaluate synergy opportunities in-market in our view. As a result of this margin accretion function, AMT’s focus with respect to incremental acquisitions is within its existing 13 market footprint.
A novel pitch for REIT investors
At recent REIT industry conferences, among the strategic issues discussed is the threat the internet poses to real estate values as telecommuting via broadband, remote computing, cloud computing, e-commerce, etc. all disintermediate physical property. AMT points out that its business, enabling wireless capacity, is a beneficiary of this trend which represents an excellent diversification and hedging opportunity for REIT investors.
We estimate AMT is currently trading at a ’15 AFFO multiple of 17.7x with 15% growth in AFFO/share. AMT trades at a discount to the 21x multiple for the other large, liquid REITs in the S&P 500 but with much faster growth (15% vs. 7%).
We estimate a ’14 dividend per share of $1.34 for AMT growing 22% which compares to the average dividend growth for the S&P 500 REITs of 11%. Although the current estimated yield of 1.5% for AMT is below the average yield for the S&P 500 REITs of approximately 3.5%, AMT’s AFFO growth rate is higher which will support faster dividend growth over time.
AMT full report – BUY
With inventories coming in slightly above expectations over the part few weeks, UNG and UGAZ have come under pressure. Though there is no particular rush given that there are still several months left in the inventory building summer period, it is worth watching the price action carefully since we are very near technical support levels.
Previously established technical support for UGAZ is in the $17-$20 level and it is currently trading between $21-22. Our opinion is that below $21 is the level to begin accumulating and aggressively so if UGAZ gets into the low to mid teens. Any sharp rallies in response to the Thursday inventory numbers are worth selling into until we reach the winter months.
We continue to like the prospects for HPQ. At less than 10x earnings, improving cash flow, improving prospects in the cloud and a better outlook for the declining printer and PC businesses, the risk/reward, even after the big move, is very attractive. It is still early in the company’s turnaround and we see a 12-18 month target of $55-$60 based on a 15x multiple on higher earnings.
Accumulation of additional shares should be done on dips but the Street is still far from strongly behind this stock and as it becomes so, that will assist in the multiple expansion. A good example of that occurred last Friday when a combination of a Goldman upgrade from sell to neutral combined with better guidance from a Intel resulted in another 5% upside move in Hewlett. Given the continued skepticism about the company and many Wall Street firms not yet having buy recommendations, it will not take much good news to have a sizable impact on the stock.
Last week’s slightly below expectation inventory report caused a strong 5% rally in UNG and an accompanying 15% rally in UGAZ. The strength of the rally is another sign of the general upward bias of natural gas as we have discussed previously. Though inventories are building each week, there is a tremendous build that is required by the end of summer to get back to normal inventory levels and as each week passes, it becomes less likely. If the summer becomes hotter than normal that will also have an impact given that natural gas is used for 1/4 of the US electricity consumption.
Strategically, we would look to add to long term positions on any significant sell offs caused by the weekly numbers and would also look to trade around the position on very significant rallies caused by the same.
As inventories are gradually building and creating any sell offs in the UNG and UGAZ ETF’s look for entry points to build a position by late fall. A warm summer will temper the sell offs and a cold winter will again cause prices to rally. One has to be vigilant on a weekly basis to take advantage of the volatility. UNG in the $22-$25 range and UGAZ in the $17-$22 range appear to be the best technical entry levels.
Interest rates are and will remain low for an extended period. Even when they do start trending higher, rates are so far below historical norms that interest rates will remain a net positive for the stock market for some time.
Mergers and acquisitions continue to be a powerful positive force in the market both in terms of reducing the supply of stock and for creating higher realized values in the companies that are acquired and their comparables.
P/E ratios remain at fair to slightly below fair value. Earnings continue to grow albeit at a slower pace than in previous recoveries.
Corporate balance sheets, dividend growth, and stock buybacks have never been healthier or more robust and they all provide positive support for the market.
So, if you aggregate the impact of all of these market forces, excluding some unpredictable exogenous event, the market has reasonable upside both this year and next in the 5-10% range. Given other alternatives, the US market remains an attractive investment and buying best of breed companies on the normal dips in the market also remains a sound strategy.