On July 24, 2023, American Tower Corp (AMT, Financial) saw its stock gain by 3.21%, with an earnings per share (EPS) of $3. However, despite this positive daily performance, we need to ask: is the stock a potential value trap? Let's delve into a comprehensive valuation analysis to find the answer.
About American Tower Corp (AMT, Financial)
American Tower Corp (AMT) operates more than 220,000 cell towers across the U.S., Asia, Latin America, Europe, and Africa, and owns and/or operates 25 data centers in eight U.S. markets. The company's primary revenue source is the top few mobile carriers in each market. The U.S. operations, with over 40,000 towers, accounted for roughly half of the company's total revenue in 2022. As a real estate investment trust (REIT), American Tower's current stock price is $190.83 per share, with a market cap of $88.9 billion. The GF Value, our proprietary measure of a stock's fair value, estimates American Tower's fair value at $297.03. This valuation suggests that the stock may be a potential value trap.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on three factors: historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the fair value at which the stock should ideally trade. When the stock price significantly exceeds the GF Value Line, it is likely overvalued, indicating poor future returns. Conversely, if the stock price is substantially below the GF Value Line, it may be undervalued, suggesting higher future returns.
Based on these factors, American Tower (AMT, Financial) seems to be a possible value trap. With a current share price of $190.83, significantly below the GF Value Line, the stock may be undervalued, but investors should think twice before investing. For a list of companies that may deliver higher future returns at reduced risk, click here.
Financial Strength and Profitability
Investing in companies with poor financial strength can lead to a higher risk of permanent capital loss. Therefore, understanding a company's financial strength is crucial before investing. American Tower has a cash-to-debt ratio of 0.04, worse than 60.5% of companies in the REITs industry. This ratio and the company's overall financial strength rank of 3 out of 10 indicate that American Tower's financial strength is poor.
Another factor to consider is a company's profitability. Companies consistently profitable over the long term offer less risk to investors. American Tower has been profitable for the past 10 years, with a revenue of $10.8 billion and an EPS of $3 in the past twelve months. However, its operating margin of 28.54% ranks worse than 75.08% of companies in the REITs industry, suggesting that while its profitability is strong, there are better-performing companies in the industry.
Growth and ROIC vs. WACC
Growth is a crucial factor in a company's valuation, as it is closely correlated with the long-term performance of a company’s stock. American Tower's 3-year average annual revenue growth rate is 10.8%, which ranks better than 83.73% of companies in the REITs industry. The 3-year average EBITDA growth rate is 9.9%, ranking better than 69.58% of companies in the REITs industry.
Profitability can also be evaluated by comparing a company’s return on invested capital (ROIC) to its weighted average cost of capital (WACC). If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. However, American Tower’s ROIC of 4.26 is less than its WACC of 6.39, suggesting the company may not be generating sufficient returns on its invested capital.
Is American Tower a Value Trap?
Despite the signs of potential undervaluation, it's important to consider the risks associated with this assessment. The Altman Z-score for American Tower is 1.11, placing it in the distress zone and signaling an increased bankruptcy risk. A Z-score above 2.99 indicates a safer financial position. The Z-score, especially relevant for manufacturing companies, considers various factors such as profitability, leverage, liquidity, solvency, and activity ratios. To understand the Z-score's role in assessing a company's financial risk, click here.
Conclusion
In conclusion, American Tower Corp (AMT, Financial) appears to be a potential value trap. Despite strong profitability and growth better than 69.58% of companies in the REITs industry, its financial condition is poor. For more information about American Tower stock, you can check out its 30-Year Financials here. To find high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
