CCI Stock Study (8-23-23)

Posted by Mark on November 6, 2023 at 06:40 | Last modified: August 23, 2023 14:48

I recently did a stock study on Crown Castle International (CCI) with a closing price of $98.71.

M* writes:

     > Crown Castle International owns and leases roughly 40,000 cell
     > towers in the United States. It also owns more than 85,000 route
     > miles of fiber. It leases space on its towers to wireless service
     > providers, which install equipment on the towers to support their
     > wireless networks. The company’s fiber is primarily leased by
     > wireless service providers to set up small-cell network
     > infrastructure and by enterprises for their internal connection
     > needs. Crown Castle’s towers and fiber are predominantly located
     > in the largest U.S. cities. The company has a very concentrated
     > customer base, with more than 70% of its revenue coming from
     > the big three U.S. mobile carriers. Crown Castle operates as a
     > real estate investment trust.

Yes, CCI is organized as a REIT. I did not realize this initially because it’s not the sort of REIT with which I am familiar [towers and fiber, although Real Estate (land) is necessary for the towers and/or fiber to be placed]. REITs are not recommended as club investments for reasons explained here.

This medium-size company has grown sales and earnings at annualized rates of 9.2% and 17.1% over the last 9 years (’13 excluded due to fractional EPS that would artificially inflate the rate to 24.0%). Lines are mostly up, straight, and parallel except for a sales dip in ’15 and EPS decline in ’16. PTPM slightly trails the industry and leads peer averages while trending up from 10.5% in ’14 to 25.2% in ’22 with a last-5-year mean of 17.8%.

Also since ’14, ROE lags peer and industry averages while increasing from 5.1% to 21.8% in ’22 with a last-5-year mean of 11.4%. Debt-to-Capital is less than peer and industry averages despite increasing from 64.0% in ’14 to 79.0% in ’22 with a last-5-year mean of 68.9%.

Quick Ratio is 0.3 and Interest Coverage is 3.3. Value Line gives an A rating for Financial Strength while M* gives a “Poor” rating for Capital Allocation for reasons other than the following:

     > The significant spending has left Crown’s balance sheet stretched,
     > although the steady tower business alleviates concerns that the
     > firm is overleveraged. Net debt/EBITDA has consistently been
     > between 5.0 and 6.0 for several years, which although high
     > relative to the market is not unusual for a tower REIT. We expect
     > the leverage ratio to stay above 5 but don’t foresee any
     > difficulty with covenants, interest payments, or debt maturities.

I will profess personal ignorance with regard to REITs. This is the first time I have studied one and I’m not sure if the requirement to pay out 90% or more of their taxable profits to shareholders in the form of dividends affects ratios like Debt-to-Equity, Current/Quick, or Interest Coverage. All three ratios seem borderline undesirable to me, but Value Line’s A rating along with M* comments suggest them to be no big deal.

With regard to sales growth:

• CNN Business projects 2.9% YOY and 0.7% per year for ’23 and ’22-’24, respectively (based on 16 analysts).
• YF projects YOY 0.4% growth and 2.0% contraction for ’23 and ’24, respectively (15 analysts).
• Zacks projects YOY 0.9% growth and 2.8% contraction for ’23 and ’24, respectively (7).
• Value Line projects 3.3% growth per year for ’22-’27.
• CFRA projects growth of 2.3% YOY and 0.9% per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 0.3% contraction/year and projects 5.0% growth/year through 2032 in its analyst report.

I am forecasting toward the lower end of the range at 1.0% contraction per year.

With regard to EPS growth:

• CNN Business projects contraction of 2.6% YOY and 5.5% per year for ’23 and ’22-’24, respectively (based on 16 analysts), along with 5-year annualized contraction of 1.1%.
• MarketWatch projects annualized contraction of 8.9% and 9.1% for ’22-’24 and ’22-’25, respectively (20 analysts).
• Nasdaq.com projects contraction of 2.8% YOY and 1.5% per year for ’24 and ’23-’25 (5/8/4 analysts for ’23/’24/’25).
• Seeking Alpha projects 4-year annualized growth of 1.1%.
• YF projects YOY contraction of 6.7% and 10.8% for ’23 and ’24, respectively (14), along with 5-year annualized contraction of 5.1%.
• Zacks projects YOY 2.4% growth and 3.2% contraction for ’23 and ’24, respectively (8).
• Value Line projects 3.1% growth per year from ’22-’27.
• CFRA projects contraction of 2.6% YOY and 1.9% per year for ’23 and ’22-’24, respectively.
• M* projects long-term annualized growth of 7.6%.

I am forecasting below the long-term-estimate range (mean and median of five: 1.1%) at 1.0% contraction per year.

Given negative growth, I need to ensure high EPS exceeds low EPS. For the former, I will use ’22 EPS of $3.86/share as initial value rather than 2023 Q2 EPS of $3.94 (annualized). For low EPS, I will use $2.67/share from 2021 (arbitrary).

My Forecast High P/E is 45.0. Since 2014, high P/E ranges from 54.1 in ’22 to 114 in ’17 with a last-5-year mean of 76.1. The last-5-year-mean average P/E is 64.7. I am forecasting below the range [and above my personal comfort zone but—see my comment above about REIT ignorance].

My Forecast Low P/E is 25.0. Since 2014, low P/E ranges from 31.5 in ’22 to 83.1 in ’17 with a last-5-year mean of 53.4. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $66.80 is default based on $2.67/share initial value. This is 32.3% less than the previous close and 31.8% less than the 52-week low.

Since 2014, Payout Ratio ranges from 155% in ’22 to 386% in ’17 with a last-5-year mean of 229%. I am forecasting below the range at 150%.

These inputs land CCI in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 14.1%.

PAR (using Forecast Average—not High—P/E) is 9.6%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 69 studies (my study and 29 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 4.8%, 7.8%, 47.8, 28.0, and 229%. I am lower across the board. Value Line has NMF for projected average annual P/E (see my fifth paragraph above professing ignorance of how ratios may differentially affect REIT treatment).

MS high / low EPS are $5.65 / $3.42 vs. my $3.67 / $2.67 (per share). My EPS range is much lower. Value Line’s projected [high] EPS is also higher than mine at $4.50/share.

MS LSPF of $94.90 implies a Forecast Low P/E of 27.7: consistent with the above-stated 28.0. MS LSPF is also 42.1% greater than mine, which results in much more aggressive zoning.

My TAR (over 15.0% preferred) is less than the 25.8% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. Per my data, PEG is not meaningful because of the -1.0% growth rate. Per Zacks, PEG is NMF. Relative Value per M* [(current P/E) / 5-year-mean average P/E] is significantly undervalued at 0.4. Kim Butcher’s “quick and dirty DCF” prices the stock at 25.0 * [$9.30 – ($7.55 + $3.35)] = -$40.00. A negative stock price is NMF and here, it’s clearly because the dividend payout [characteristic of REITs] is so high.

CCI is a BUY under $91. With a forecast high price of $165.20, I would estimate TAR to qualify at or below $82.60/share.