Event-Driven Surge Misinterpreted As Secular Forms Opportunity At Crown Castle (NYSE:CCI)

I posit that event-driven surges are frequently being mispriced as sustaining in nature. Identifying event-driven growth or event-driven headwinds that are being interpreted as secular presents substantial opportunity as prices correct. This idea will have 3 parts:

1. The mechanics behind the opportunity
2. Historical examples where mispricing of this nature clearly occurred
3. Current opportunity in which Crown Castle (NYSE:CCI) is mispriced due to misinterpreted event-driven surge.

Understanding how an event-driven surge affects earnings and should impact market pricing.

I think it can be best understood through the lens of cyclicality in terms of how multiples adjust to accommodate.

The market is quite adept at properly pricing cyclicality. As the earnings of a cyclical company rise in response to an upswing, the market instinctively and correctly trades it at a lower earnings multiple. A cyclical company should trade at the lowest multiple at the peak of a cycle and at the higher multiple at the trough of the cycle.

It is the market correctly reading through to the normalized earnings figure. Earnings of $1, $3, $5, $3, and $1 over a 5-year period should be valued quite similarly to just earning $3 each year. So if this is an industry where the natural multiple is 10X, the company should trade for $30 regardless of which point of the cycle it is at. That means its multiple should range from 6X in the peak $5 earnings year to 30X in the trough $1 earnings year.

Essentially, the multiple accommodates for what portion of the cycle the company is in.

A similar multiple adjustment should be applied to event-driven surges and struggles, but it seems the market is less skilled at reading through to normalized earnings. There are some key differences between event-driven surges and cyclicality, which are perhaps making it more difficult for the market to identify.

Cyclicality versus surges

Cyclicality tends to be more repetitive in nature. In its most basic form, it would be something like seasonality. Consider a tropical resort that does great in the winter as people want to go somewhere warm, but does minimal business in the summer. There is a clear pattern to when the stronger and weaker earnings will come in. Due to the repeated nature, investors label such companies as cyclical and trade them accordingly.

Event-driven surges are different. They can happen to companies that are otherwise considered growth companies or steady state. So while the earnings from a surge will follow the same 1,3,5,3,1 style of earnings as a cyclical company, investors often misread the 1,3,5 as being true growth. The earnings are treated as normalized earnings rather than peak earnings, and the multiple is not properly adjusted downward to reflect the surge.

A clear historical example of this is Zoom Video (ZM) during the pandemic.

The event-driven surge

When the pandemic forced the entire world to telecommute, ZM had an impressive surge of demand. However, as this was a growth company, it didn’t get recognized as an event-driven surge. Instead, it was seen as the early innings of its S curve. The market priced it in as if it was a sustaining growth trajectory.

The counter-reaction

As the pandemic became endemic, it became clear that the demand surge was event-driven and not sustaining. The stock had to correct from its extraordinary multiple and $500 per share level to the much more reasonable $61.75 and 13X multiple where it trades today.

Zoom is a fine company, the problem was that the market priced it wrong by misinterpreting the event-driven surge as secular growth.

How to take advantage

The means of profiting from such mispricing is quite straightforward. If one can identify an event-driven surge that is priced as secular, they can buy or sell the stock (depending on direction of mispricing) when it is severely mispriced and wait for its price to return to fair value.

With Zoom, for example, one could have shorted it anywhere during the extreme pricing and would have made a great profit. It may have required waiting for a while depending on where in the surge pricing they executed the trade.

I did not have the guts to actually short Zoom, but I did short Peloton (PTON) which was a very similar event-driven demand surge.

Event-driven surges are frequently misinterpreted in this fashion, and we believe there are similar opportunities today. Below, we will discuss a buying opportunity in which the market pricing is out of whack due to a one-time special event that has been misinterpreted as recurring.

The long opportunity: Crown Castle (CCI)

CCI’s earnings have been struggling as of late, which has caused the stock to reprice at a dramatically lower multiple. In the last 3 years, CCI has fallen from over $200 to under $100.

It previously traded at FFO and AFFO multiples in the 22X-30X range.

Today, it is trading at less than 15X forward FFO and AFFO.

The multiple in the high 20s indicated the market believed CCI was a growth company. Today’s multiple below 15X indicates the market now thinks CCI is not really growing.

So CCI is seen as a busted growth stock. That narrative tracks with the FFO/share and AFFO/share, which have trended down from the 2022 peak.

FFO/share has declined from $7.75 in 2022 to an expected $6.63 in 2025.

AFFO/share has declined from $7.38 in 2022 to an expected $6.81 in 2025.

What the market is missing

CCI’s earnings declines can be traced almost entirely to a single event: Sprint being bought by T-Mobile (TMUS). Tower REITs have been very profitable because they can rent the same tower to multiple tenants. A single tower can collect rent from AT&T (T), TMUS, Verizon (VZ) and Sprint.

Well, once TMUS bought Sprint, the combined company no longer needed to rent each tower twice. So they are letting Sprint leases lapse when they expire. 4X revenue towers went to 3X revenue towers. It is a substantial hit, and CCI’s earnings have legitimately fallen as a result.

I think this is clearly an event-driven headwind. Cessation of Sprint leases is a $255 million hit to runrate FFO.

That is a roughly $0.60 per share hit to runrate FFO.

On top of that, the 2022 and 2023 earnings figures were inflated by payments to CCI from Sprint for early cancellation of leases.

Thus, the decline in FFO/share from 2022 to 2025 reflects the delta from inflated numbers to trough numbers.

The growth story if we net out Sprint event-driven headwind.

2021 was largely unaffected by the Sprint buyout. FFO/share was $6.39. 2025 FFO/share is expected to be $6.63 and that includes the permanent loss of $0.60 per share from Sprint leases.

While these earnings are permanently gone, Sprint churn is not going to recur. As Dish has largely failed to fill the shoes of Sprint, which was how TMUS got the deal past anti-trust, it would be nearly impossible for any of the big 3 to merge with each other. As such, the possibility of Sprint style churn recurring seems very remote.

Forward growth will be more based on organic billings growth and small cells. In both cases, the growth seems in-line with historical growth.

In 2023, excluding the Sprint stuff, CCI’s towers had organic growth of 5%. In 2024, macro towers are expected to have organic growth of 4.5% and small cells are expected to grow by 13%.

How it should have been priced in

CCI’s market price should have been hit proportionally to the drop in FFO. A proportional drop would mean the multiple would stay the same.

By dropping the multiple on top of the FFO/share dropping the market priced in adverse expectations for future growth. This would be correct if the growth story were busted, but it seems to us that the growth was merely interrupted.

Sprint cancellations legitimately hurt CCI’s revenue stream, but the underlying growth story remains intact, with macro towers still able to consistently increase rents and rapid buildout of small cells creating new revenue streams.

Crown Castle – Fair value

Perhaps the former 25X or higher multiple was a bit overpriced for the current environment, but based on tower fundamentals, I think it should still have a growth multiple. Based on forward growth rates, I think 20X trough AFFO would be fair value, which would be a market price of about $140. This is using AFFO of $6.81 which includes no earnings from Sprint.

Organic billings growth and small cell alone can facilitate mid-single digit annual growth, and then whatever happens with the fiber is potentially icing on the cake.

Wrapping it up

When single events materially alter the earnings of a company that is not otherwise cyclical, it can be difficult to interpret the lasting impact. The market seems to have a tendency to extrapolate linearly, even when the origin of the change is clearly a one-time event. Event-driven surge has been a significant source of mispricing, and learning to identify it can reveal many opportunities.