Crown Castle Earnings: Soft 2024 Guidance Includes Current Weak Demand but Isn’t as Bad as It Looks

Crown Castle’s CCI 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.

Third-quarter organic cash tower leasing growth was up 4.4% year over year, the slowest rate of growth in any quarter since 2020. It’s unsurprising that new activity from the carriers has slowed, considering carrier rhetoric following heavy investment in 2021 and 2022 after they first received new spectrum licenses. Crown expects a similar level of growth next year. Given the need for wireless network investment generally, the runway that remains to fully build 5G networks, and contractual escalators, we believe a mid-4% level of annual growth looks like a floor.

Encouragingly, we estimate organic small cell revenue growth would’ve been about 8% year over year excluding churn related to Sprint, and management expects a further pickup in small cell activity next year. Small cells have been extremely disappointing up until now, in our view, growing only in the midsingle digits the past few years despite very high capital investment by Crown. After adding 10,000 new small cell nodes in 2023, Crown expects to add 14,000 in 2024, which would be an annual record. Also encouraging, the firm expects 50% of the new nodes to be colocated on existing fiber, which results in higher margins and lower incremental capital spending.