SBA Communications: A Solid Prospect In The Telecommunications Space (NASDAQ:SBAC)

Over the past several years now, I have come to really appreciate the telecommunications industry. Not every aspect of it is appealing to me. But one that is involves the ownership and leasing out of telecommunications towers. This checks off all of my major boxes. It’s a stable industry with strong cash flows. It’s an industry that is all but guaranteed to continue growing, at least for the foreseeable future. It’s difficult for new entrants to get into. And it is simple to understand.

Historically speaking, much of my emphasis on this industry has focused on American Tower (AMT) and Crown Castle (CCI). But when we are talking about the US market, there is another big player that deserves attention. And that is none other than SBA Communications (NASDAQ:SBAC). Unlike American Tower, which has started to diversify into data centers, and unlike Crown Castle, which is really emphasizing small cells, SBA Communications is trying to stick, for the most part, with a pureplay model dedicated to owning and leasing towers. Like American Tower, it is focused on owning not only domestic assets, but also ones across the globe. In recent years, its emphasis overseas has intensified, opening up the door to long-term growth. When you factor in all of this, and you consider how shares are currently priced, I would argue that the company warrants a good deal of optimism. At the end of the day, I have even decided to rate it a ’buy’.

This does not mean that I am married to my view of the company. The fact of the matter is that, after the market closes on April 29th, management is expected to announce financial results covering the first quarter of the 2024 fiscal year. At present, they seem bearish on revenue but bullish on profitability. At the end of the day, bottom line results are what matter most to me. So as long as the company can more or less hit what analysts are forecasting, or at least not fall terribly short of it, I don’t see my opinion changing in either direction.

Solid growth

A lot of attention these days seems to be on the two big players in the market. These companies are American Tower and Crown Castle, boasting market capitalizations of $89.92 billion and $43.53 billion, respectively. But in terms of sheer market value, SBA Communications is no slouch. As of this writing, the company has a market capitalization of $23.03 billion. Given the size, it’s not difficult to imagine that the company has a lot going for it. Consider, for instance, the growth that management has been able to achieve over the past several years.

Revenue, for starters, has grown from $2.01 billion back in 2019 to $2.71 billion in 2023. That’s an annualized growth rate of 7.7%. I know this is not exactly a high growth market. However, you don’t need to have strong growth in order to generate strong returns from your investments. It’s also worth noting that, while this revenue growth rate does fall short of the 10.1% seen, per annum, from rival American Tower, it does beat out the 4.9% annualized upside seen by Crown Castle.

The upside that management has captured has been the result of continued acquisitions and new builds of telecommunication assets. Back in 2019, the company had 32,403 telecommunication sites across the globe. By 2023, this had grown to 39,618. Domestically, growth has been rather slow, with the company expanding from 16,401 locations to 17,487. That’s a total growth rate of just 6.6%. The business has seen much faster growth coming from international markets, with the number of sites growing from 16,002 to 22,131. That’s a 38.3% rise over the span of five years.

Unfortunately, management did not reveal how many sites that the business had in Brazil back in 2019. But there’s no denying that it has been a major location of interest for the company. In 2020, for instance, the business had 9,934 telecommunication sites located in that country alone. But by 2023, this number had grown to 12,713. In fact, over the last four years, its growth in Brazil has accounted for 48.3% of overall location growth in international markets and for 41.5% of total global growth.

Honestly, it’s not difficult to understand why this is. For starters, Brazil is a large and vibrant country. It boasts a population of 217.36 million people. While this is still significantly smaller than the 341.40 million people currently in the US, the US market, as the image below illustrates, has largely reached market saturation when it comes to telecommunications towers. By the middle of last year, 5G was being used by over 10 million different people in the country. And according to some forecasts, it’s estimated that about 179 million people will be subscribed to 5G across the nation by the year 2030. By that point, that would translate to roughly 84% of the country’s population. It also helps that Brazil is fairly dense for a country that is so large and still in the early phases of 5G adoption. In the US, there are around 89.9 people for every square mile. In Brazil, this is only a bit lower at 66.1. The more densely populated areas are, the more profitable that telecommunications towers become.

Although more than half of the towers that SBA Communications owns are in international markets, only a small portion of the company’s revenue comes from those areas. In 2023, for instance, only 26.63% of revenue generated from the site leasing operations of the firm was attributable to these overseas assets. This makes sense when you consider that there are significant differences in GDP per capita between the domestic space and various overseas countries. In the US, GDP per capita is about $83,060. In Brazil, for instance, this is only $11,030. However, the firm’s share of revenue coming from outside of the domestic space is growing. Back in 2019, only 20.09% of revenue came from its international businesses. Over the same window of time, its share of profits increased from 7.84% to 11.64%. And this has been the result of both strong revenue growth and an increase in the international site leasing profit margins that the company generates from 12.95% to 16.69%.

This doesn’t mean that the firm’s domestic operations should be ignored. They absolutely should not. Although its share of revenue has dropped in recent years, profit margins for the company’s domestic site leasing operations have grown nicely. Overall profits increased from $569.1 million to $849.6 million. Some top line growth can be thanked for this. But most of the improvement came from increased profit margins. In 2019, the domestic site leasing profit margin for the business was 38.27%. By 2023, it had shot up to 46.01%. This kind of improvement has only been made possible by the company’s ability to continue ratcheting up its fees. As you can see in the image below, for instance, from the first quarter of 2022 to the final quarter of last year, the company has been successful in continuing to achieve organic leasing growth. As time goes on, I expect this trend to continue.

Higher profit margins naturally translate to higher profits and cash flows at the end of the day. In the past five years, net income for the company skyrocketed from $147 million to $501.8 million. Other profitability metrics should also be focused on as well. Operating cash flow, as an example, shot up from $970 million to $1.54 billion. If we adjust for changes in working capital, we get a more modest rise from $974.5 million to $1.48 billion. And lastly, EBITDA for the business grew from $1.41 billion to $1.89 billion. It’s good that cash flows have been so robust in recent years. This has given the company plenty of fuel with which to grow and allocate toward returning to shareholders. In the last five fiscal years, for instance, the company has spent $3.29 billion on acquisitions. This was at the same time that the business was allocating $2.44 billion share repurchases, followed by another $1.22 billion that was dedicated to dividends. There were other allocations as well, such as the $374.5 million that the company dedicated to construction and related expenses.

Using these steady and gradually slowing cash flows, valuing the company becomes a fairly straightforward affair. In the chart above, you can see how shares are priced using two of the valuation metrics that I calculated. I then decided to compare the company to its two major rivals, American Tower and Crown Castle, as shown in the table below. Admittedly, shares are more expensive than what you would get by picking up Crown Castle. However, they are still cheaper than American Tower happens to be at this point in time.

Click to enlarge

One of the most important traits as investors is flexibility. We should always be willing and able to change our opinion on an issue if new data comes out that shows we are wrong in either a positive way or a negative way. Although I am currently bullish about the firm, I do know that new data is coming out that could change my overall stance on it. This data is expected to come out after the market closes on April 29th. And it should cover the first quarter of the company’s 2024 fiscal year. It appears as though analysts are expecting a decline in sales, with revenue expected to fall from $675.5 million last year to $669.9 million this year. On the other hand, profitability is expected to increase from $0.93 per share to $1.20 per share. That would take net income up from $101.2 million to $130.7 million. Naturally, there are other profitability metrics that investors should be paying attention to. And if net income rises, those are also likely to increase. For reference, these can be seen in the table below.

Takeaway

When it comes to quality companies in a great industry, it’s difficult to not like SBA Communications. The company has demonstrated consistent growth in recent years. Cash flows are robust and growing. Shares look attractively priced on an absolute basis while being in the middle of the two major competitors from a pricing perspective. Add all of this together, and I definitely think that the firm is worthy of a ‘buy’ rating.