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Kevin Kersten's Analyst Insights

Options Analyst Writer
Kevin Kersten
Author Bio

December 2, 2013 - Profit From Our Need to be Connected

There was a day not that long ago when no one had a smartphone or a tablet. It seems crazy to think that somehow life still went on, but now, they are part of our life. We surf on the go and instantly have the latest social media updates, wherever we are. We have access to email, maps, voice-activated search and we can do it all while driving down the road. To think, once upon a time we actually printed out directions -on paper- a substance made from ground up dead trees! I guess once upon a time we rode on horseback, too.

While life can theoretically exist without a mobile phone, you are unlikely to find a teenager willing to give up their phone to prove it. We all have them, love them and use them every day. We are likely to keep increasing our dependence, using our devices more and more, which is good news for the phone companies. It isn't  just smart phone makers Apple (AAPL) or Google (GOOG) and carriers Verizon (VZ) or AT&T (T) that are pulling in profits. Of course they are, but I am actually thinking of another company that supports our internet habits.

I am talking about Crown Castle International (CCI). CCI licenses space on the tower network and even sells tower rights to the phone carriers. As all the carriers upgrade and expand networks, they fill in more tower sites to feed the growing need for data. CCI has also decided to change its stock into a real estate investment trust, a classification that has tax benefits and pays out mandatory dividends to investors.

Crown Castle runs about 32,000 tower sites across the US and Australia with plans to add more. The company bought a significant number of cell sites from the carriers, like AT&T, who then lease space on the towers back. Of the company's towers, 71% are in the top 100 markets. Given that the towers are already physically up, and were planned to be able to support multiple sets of equipment, additional leases are looking highly profitable.

One might better understand what is happening by looking a little more closely at the cell tower and phones. The first generation of cell phones had long ranges such as 50 miles, but now cell phones have shorter ranges like 5 miles. If you think about a straight line such as a road, if one user takes up 50 miles in each direction and he is only one who can use this frequency. By setting up multiple towers and limiting the range to 5 miles now five users can use the same frequency and leave a needed space between them. If the power is reduced to 1 mile, then 25 conversations can take place. In reality it takes place in three dimensions, and so it can be many times more and multiple people can use the same frequency, but the point is more low power sites means more capacity over limited airwaves.

Yes, the range of a single cell phone has gone down, but the number of towers, and phones using those frequencies has gone way up. Today phones and towers use only enough power to reach each other. If you are near a cell phone tower your phones battery actually lasts longer! Whether you choose Sprint, AT&T, Verizon or T-Mobile you will be able to use your phone in the big city, but as more and more people want to use the phone frequencies can become jammed. There are a limited number of towers receivers and frequencies. As becomes evident every time there is a disaster, everyone cannot call at once. One tower might be able to handle a few hundred conversations at once. When you put up more towers, you are then able to handle more and more transmissions over the same frequencies because power is reduced and frequencies are reused. Since companies already have coverage, building out the next generation of coverage is adding cell sites, reducing power and allowing more users on the systems. This has changed the dynamics in cities and turned tower locations from a competitive advantage into a commodity. In order to get access to other sites, it helps to give access to your own. By putting multiple carriers and receivers on different tower sites all the companies can benefit with cheaper access, more sites and expanded network capacity. It is a win-win situation and CCI is one of the big players as it owns a large number of the sites making it possible.

Erecting towers is not cheap, in the early days of cell phones, multiple companies all erected their competing towers right next to each other. While towers do have a capacity of equipment and it is true that the limited best locations, such as on a hill, it means towers get erected next to each other. By licensing out the tower space, companies can save a lot of money and get more equipment, capacity and users on air. Companies may not share all their cell sites, but in many areas this is now the smart thing to do. Some of that extra savings of not erecting towers goes into the bottom line of Crown Castle International. Companies also know they are expanding networks and getting more users by having more locations so they are playing along.

With CCI licensing sites, with new equipment and expanded services coming online and with a transition to a Real Estate Trust required to pay out earnings CCI is looking good. The company is rated a 5 STARS strong buy. Earnings is expected to rise from $0.58 in 2013 to $1.48 in 2014 and $2.15 in 2015. Revenues rose 20% in 2012, should rise 23% in 2013 and 18% in 2014. 

CCI has found a good niche. While other companies can set up sites, barriers to entry such as local zoning board meetings and construction costs gives them a long term competitive advantage. With vast profits to be made in cell services, companies may do well to outsource locating the towers.

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