A Buying Opportunity in Wireless Tower Stocks (AMT, CCI, SBAC)

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By Nelson Hem | March 9, 2013 5:55 AM EST

Analysts at Bank of America's (NYSE: BAC [FREE Stock Trend Analysis]) Merrill Lynch division said today in a report that they see a buying opportunity in wireless tower stocks.

Among the reasons they cited were attractive valuation, a favorable interest rate and inflation environment, and a spending outlook by wireless carriers that is strengthening. And they blamed the recent lack of momentum in the industry on caution due to potential mergers and acquisitions.

Merrill Lynch has Buy ratings on industry leaders American Tower (NYSE: AMT), Crown Castle International (NYSE: CCI) and SBA Communications (NASDAQ: SBAC).

American Tower

This Boston-based real estate investment trust has a market capitalization of about $30 billion. Its dividend yield is near 1.2 percent, and the price-to-earnings (P/E) ratio is in the same ballpark as the industry average. The communications infrastructure company also has a long-term earnings per share (EPS) growth forecast of almost 20 percent. The return on equity is more than 20 percent.

The number of shares sold short, as of the February 15 settlement date, represents about one percent of the total float after rising almost five percent from the previous period. That is the highest level of short interest in American Tower since November.

All but four of the 21 analysts who follow the stock and were polled by Thomson/First Call recommend buying the shares, while none of them recommend selling. The analysts feel the stock has some room to run as their price target represents about 10 percent potential upside over the current share price. That target would be a new multi-year high.

Though the shares jumped about seven percent last week, the share price is down almost two percent year to date. The stock has underperformed the other two tower stocks featured here over the past six months, but its performance had been in line with the S&P 500.

Crown Castle International

This wireless infrastructure company is headquartered in Houston, and it sports a market cap of about $21 billion. Its long-term EPS growth forecast is about 19 percent, but the P/E ratio is higher than the industry average. The operating margin is greater than the industry average, but the return on equity is only about seven percent. Crown Castle offers no dividend.

The short interest in Crown Castle was more than one percent of the float at mid-February, after dropping about 22 percent from the previous period. That was the lowest number of shares sold short in at least a year.

Fourteen of the 20 analysts surveyed recommend buying shares, which has been the consensus recommendation for the past three months. Their mean price target, or where analysts expect the share price to go, is more than 10 percent higher than the current share price. That target would be a multiyear high as well.

The share price is down about four percent year-to-date but also about 34 percent higher than a year ago. Over the past six months, the stock has underperformed SBA Communications but outperformed the broader markets.

SBA Communications

This $9+ billion market cap company operates wireless communications towers in North, Central and South America. Note that the return on equity is in negative territory, though the operating margin is greater than the industry average. The long-term EPS growth forecast is about 10 percent. The company offers no dividend.

The short interest in SBA Communications has been dwindling since the end of December, but the number of shares sold short still is more than 14 percent of the total float. The days to cover is now less than nine.

Sixteen of the 18 analysts surveyed recommend buying shares, and none recommends selling. Their consensus price target represents more than 10 percent potential upside, relative to the current share price. Here again, the consensus target would be a new multiyear high.

The share price is about the same as it was at the beginning of the year, after pulling back and recovering in the meanwhile. Shares are trading almost 49 percent higher than a year ago, though. This stock has outperformed the competitors mentioned above, as well as the broader markets, over the past six months.

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