Company Reports

Crown Castle’s first-quarter results contained no surprises, as they were neatly in line with management’s prior outlook. New investment on towers from mobile carriers has remained muted, and small cell revenue growth has accelerated. However, we’re enthused about the company’s direction following the strategic and operational review of the fiber segment and the installation of a new CEO, Steven Moskowitz, last week. We believe there are numerous opportunities for upside in narrow-moat Crown’s stock, as we’re maintaining our $130 fair value estimate. We attribute the extreme selloff in the past month entirely to the violent spike in interest rates. Crown is likely to remain sensitive to interest rates in the near term, but we see a lot of value being overlooked.

Crown Castle has a different strategy than its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and has aggressively invested in fiber to pursue small cell communications sites. After years of disappointment and sucking up capital, we think the small cell business is past the point of destroying value, making it much more attractive to operate or to sell.

The parade of negatives that hit Crown Castle in 2023—all of which we think are overblown—include activist pressure to dispose of the underwhelming fiber business, a slowdown in wireless carrier spending, looming Sprint churn and related liquidity concerns that could threaten the dividend, and a management shakeup that has resulted in an interim CEO and three new board members. As the firm’s fourth-quarter results and reaffirmed 2024 guidance indicate, tower leasing remains strong, the fiber business is significantly improving, and Crown has a healthy amount of liquidity that we think will enable it to maintain its dividend. We were encouraged by the rhetoric from the new CEO and believe Crown is on a healthy course. We are maintaining our $130 fair value estimate, and we think the stock is attractive.

Crown Castle’s third-quarter results were generally in line with the slowdown in leasing activity seen in the U.S. recently, and the firm’s 2024 guidance implies a continuation of the trend into next year. However, the declines in sales and profits the firm projects in 2024 don’t account for the 2023 tailwinds that included significantly higher noncash revenue and a lump-sum payment from T-Mobile. Also, it appears small cell leasing, which we’ve long been disappointed in, is turning a corner. Weaker tower leasing and higher costs in 2024 and higher small cell capital spending assumptions lead us to reduce our fair value estimate from $137 to $130, but we think the stock is significantly undervalued.

Crown Castle has a different strategy than its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and has aggressively invested in fiber to pursue small cell communications sites. We like the prospects for towers more than small cells and therefore prefer the businesses of Crown’s competitors.

After a long stretch of overvaluation, sentiment around the wireless tower industry has swung the other way. Each of the five independent tower firms we cover globally is now undervalued relative to our fair value estimates and trading in a 4- or 5-star range. Though the stocks have been volatile, especially around interest rate movements, we haven’t seen much change to the companies’ fundamentals. We believe tower firms have long-term secular tailwinds, great business models that include contractual recurring revenue with annual escalators, and narrow moats. In our view, the market has presented a compelling opportunity.

Crown Castle reported a good second quarter, as organic tower leasing growth was slightly better than we anticipated. Fiber leasing fell short of what we expected, as small cell sales growth—which we expect to accelerate—remained muted, and fiber solutions continued to struggle. While Crown did not revise its full-year site leasing revenue guidance, it cut its profit forecasts slightly because of lower tower activity from the carriers, which affects nonrecurring services revenue. More impactful in our view is the effect this year’s activity will have on next year’s new leases. We are modestly reducing the level of acceleration we had projected for next year, leading us to lower our fair value estimate to $137 from $140.

Crown Castle has a different strategy than its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and has aggressively invested in fiber to pursue small cell communications sites. We like the prospects for towers more than small cells and therefore prefer the businesses of Crown’s competitors.

As expected, Crown Castle's tower sales growth decelerated in the first quarter after record network spending by wireless carriers in 2022. Fiber segment growth was very weak, even as Sprint churn had only a negligible impact during the quarter. However, management maintained its full-year guidance, and small-cell deployments that will occur over the remainder of the year are generally locked in already. With a significant portion of the small-cell pipeline consisting of co-located—rather than anchor—nodes, we’ve become much less bearish on the business. We still don’t expect small cells to rival towers in terms of profitability, though. We’re maintaining our $140 fair value estimate and don’t believe the stock is materially undervalued.

Crown Castle has a different strategy than its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and has aggressively invested in fiber to pursue small cell communications sites. We like the prospects for towers more than small cells and therefore prefer the businesses of Crown’s competitors.

Fourth-quarter results told a familiar story for Crown Castle. The tower business remained strong and is seemingly running on autopilot. The fiber segment, which includes small cells, has not yet performed at a level commensurate with the huge amounts of capital the firm has invested in it. However, while we still don’t think the small-cell business will be nearly as attractive as towers, we’re more optimistic than we’ve been in recent years. Most concretely, we think Crown has moved beyond the point where fiber will be a drag on economic profits. We plan to raise our fair value estimate to $140 per share from $135, implying that the stock is fairly valued.

As has been the case for most of the past two years, Crown Castle’s tower business had an excellent quarter while small cell results were disappointing. Long term, we expect towers to remain strong and for small cell sales growth to accelerate significantly from 2022 levels, but the outlook management provided for 2023 implies a weaker year. Offsetting our weaker 2023 forecast, Crown Castle will receive about $165 million in cash payments from T-Mobile in 2023 in exchange for the early cancellation of some Sprint small cell contracts. We are maintaining our $135 fair value estimate and believe the stock is fairly valued.

Crown Castle's strategy has deviated from that of its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and is aggressively investing in fiber to pursue small-cell communications sites. In our view, Crown Castle has adopted a high-risk strategy. We acknowledge the potential upside, but small cells require heavy initial investment and lack the competitive advantage that Crown has with its towers.

Crown Castle's strategy has deviated from that of its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and is aggressively investing in fiber to pursue small-cell communications sites. In our view, Crown Castle has adopted a high-risk strategy. We acknowledge the potential upside, but small cells require heavy initial investment and lack the competitive advantage that Crown has with its towers.

As Crown Castle’s second-quarter results reinforced, towers continue to be a phenomenal business for the firm—exhibiting continually strong organic growth while requiring negligible investment—while small cells remain a business that presents hope on the horizon rather than performing well today. Nothing in the quarter changed our skepticism that small cells will ever add value to Crown Castle, and we think key tower metrics are at peak levels, though we don’t project a material drop off in tower results. With little in the quarter to change our view, we are maintaining our $135 fair value estimate.

Crown Castle's strategy has deviated from that of its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and is aggressively investing in fiber to pursue small-cell communications sites. In our view, Crown Castle has adopted a high-risk strategy. We acknowledge the potential upside, but small cells require heavy initial investment and lack the competitive advantage that Crown has with its towers.

Little changed in the narrative or the results from Crown Castle’s first quarter. The tower market remains strong, and management reiterated its expectation that high levels of tower leasing activity will persist and lead to good tower growth for several years. Nothing material changed in the fiber business, either. Small cell sales growth remains unimpressive, but the slower rollout of small cells the past couple years makes it unsurprising. Crown Castle expects to double the number of small cells it brings on air in 2023, which may bring some of the focus away from towers. As has frequently been the case, the company raised full-year sales guidance due to noncash items that won’t affect funds from operations or cash flow. We are maintaining our $135 fair value estimate.

Crown Castle's strategy has deviated from that of its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and is aggressively investing in fiber to pursue small-cell communications sites. In our view, Crown Castle has adopted a high-risk strategy. While we acknowledge the potential upside, small cells require heavy initial investment and lack the competitive advantage that Crown has with its towers.

Crown Castle's strategy has deviated from that of its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and is aggressively investing in fiber to pursue small-cell communications sites. In our view, Crown Castle has adopted a high-risk strategy. While we acknowledge the potential upside, small cells require heavy initial investment and lack the competitive advantage that Crown has with its towers.

In keeping with the trend seen throughout 2021, Crown Castle’s fourth-quarter update showed that the tower business is unequivocally strong while small cell results are poor, despite continued management optimism. Although recent news surrounding small cells is noisy and opaque, management sounded confident that 2023 will be an inflection point, supported by its recent deal with T-Mobile. We remain convinced that Crown’s business would be far better if it focused exclusively on towers, but as we made clear last year when we upgraded the firm’s moat rating to narrow, we no longer think small cells will be a big drag on Crown’s returns on invested capital. We believe value-destructive capital spending is now past, and we are adjusting the weighted average cost of capital we use in our valuation to reflect lower risk. As such, we’re raising our fair value estimate by about 20%, to $135, though our forecast has not materially changed.