REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors. This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward. Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how American Tower Corp (AMT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): American Tower Corporation is an independent owner, operator and developer of communications real estate. The Company is engaged in the leasing of space on multi-tenant communications sites to wireless service providers, radio and television broadcast companies, wireless data and data providers, government agencies, and municipalities and tenants in a number of other industries. It has a portfolio of over 87,000 communications sites. The Company’s continuing operations are managed through three segments: Domestic Rental and Management, which includes its property interests that it leases to communications service providers and third-party tower operators in the United States; International Rental and Management, which includes its interests in international communications sites, and Network Development Services, which offers tower-related services domestically, including site acquisition, zoning and permitting services and structural analysis services.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$41,675,062,274||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.69||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||434.95%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||54.70||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||6.35||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||0.69||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-39.57||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||15.00%|
|MG Value based on 3% Growth||$26.08|
|MG Value based on 0% Growth||$15.29|
|Market Implied Growth Rate||23.10%|
|% of Intrinsic Value||142.08%|
American Tower Corp does not qualify for either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio, short dividend record, and high PEmg and PB ratios. The Enterprising Investor has concerns with the level of debt in relation to the current assets. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.82 in 2011 to an estimated $1.80 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 23.10% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on American Tower Corp (AMT)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$45.34|
|Number of Consecutive Years of Dividend Growth||4|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep15|
|Total Current Assets||$940,355,000|
|Total Current Liabilities||$1,369,508,000|
|Shares Outstanding (Diluted Average)||427,227,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.13|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.80|
Other ModernGraham posts about the company
|26 Companies in the Spotlight This Week – 11/22/14|
|American Tower Corporation Annual Valuation – 2014 $AMT|
Other ModernGraham posts about related companies
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.