Thursday, January 28, 2010

Crown Castle down 4% as focus shifts from debt schedule to valuation (CCI)

Communications tower-operator Crown Castle (CCI) is down 3.5% this morning, despite beating Street estimates on revenue and "earnings." That's in quotations because CCI doesn't "do" earnings due to massive depreciation and amortization expenses. The conference call is going on right now, and management is citing studies about the growth of smartphones and their "insatiable" appetite for bandwidth - bandwidth that must run on CCI's towers. The difficult thing with this company is reconciling the excellent growth prospects with the razor-thin margin of error they've left themselves with regard to debt payments and leverage ratio's. Crown Castle's cost of capital must be calculated to be around 8%, and their Free Cash Flow Yield is below that - even with taxes being a benefit instead of a provision (they don't pay taxes, but rather get a credit against future taxes).

Despite today's drop, CCI shares are up 16% since I called them overpriced on November 3rd. Right or wrong, always honest. I believe now as I did then that this is a leveraged finance company. They have beautiful cash flows, but are levered to the moon. The company's market value is $10.7billion and total debt outstanding is about $7billion.

Most important for this firm and its investors is the massive debt burden, and its maturity schedule. Less than a year ago, shares traded at levels suggesting a bankruptcy. In 2009, management did a masterful job in the debt markets, pushing off debt maturities and achieving a weighted average interest rate of 5.75%. The extension of maturities did come at a heavy cost, as q4 interest expense of $118.9million was an increase of 35%.

Looking at the q4 results, gross margin has improved by 1.6%. The firm's operating model is juicy, as the same rental site adds more and more tenants.

Capital expenditures were down 60% in 2009 versus 2008, and that's not a sustainable decline.

Look - CCI is in a marvelous business, but as I said above they are leveraged to the moon. If they actually paid taxes they would be dangerously close to breaking loan covenants. Not my cup of tea.

Copyright 2010 AlphaNinja

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