Running a wireless network requires a multitude of antennas, cell towers, and the wires that connect them all. While the likes of AT&T (T) and Verizon Communications (VZ) compete over customers, American Tower (AMT) and Crown Castle (CCI) own and maintain tens of thousands of cell towers and miles of fiberoptic cable. They lease space to the wireless carriers, much like any landlord.
And they make a mint doing it. Profit margins are wide, recurring revenue is high, and future visibility is clear, given long-term contracts with annual escalators. In developed markets, recent growth has come from upgrading wireless networks to support 5G, which requires larger and heavier equipment that generates more rent, and more antennas to handle the wider range of wireless spectrum bands 5G requires.
IHS (IHS) had its initial public offering last fall. It’s a minnow in the business, with a $2.1 billion market capitalization, compared with American Tower’s $122 billion. IHS differs most by its focus on emerging markets, where the wireless business is in an earlier stage of growth and the cell-tower leasing model is relatively new. It has some 31,000 towers across 11 markets in Africa, Latin America, and the Middle East, with most of its revenue coming from Nigeria.
There are macro tailwinds: Population growth is fast, smartphone penetration is increasing, and many countries are only just beginning to think about 5G. IHS’s organic revenue growth has been 18% a year over the past half-decade, while adjusted earnings before interest, taxes, depreciation, and amortization—Ebitda, for short—have increased 15% annually. Its 51% margin is staggeringly high, its free cash flow is strong, and leverage is manageable at current levels.
Not everything is perfect. About half of IHS’s revenue is contractually tied to the U.S. dollar or the euro—mostly resetting quarterly—with the rest coming in local currencies, such as the Nigerian naira, the Brazilian real, and the South African rand. Those have uniformly lost value versus the greenback this year. And because of unreliable electrical grids in many of IHS’s markets, the company relies on diesel generators as primary or backup power for a quarter of its cell towers. As oil prices have spiked, so have IHS’s costs. It’s investing in solar power and batteries to reduce the impact.
The bigger issue might be the stock’s particularly low float. Insiders own 95% of shares, with tranches of 20% becoming available every six months, the next one in October. That will help to increase the universe of potential investors and eventually allow the company to use its free cash flow to buy back stock.
IHS stock has fallen 63%, to $6.27, from its October IPO price of $17, thanks to those issues. It’s now trading for around 12 times projected 2023 earnings, well below its larger peers American Tower and Crown Castle, which go for more than 45 times next year’s earnings despite their slower growth.
That discount more than compensates for emerging market risk, while the stock’s decline represents a buying opportunity for long-term investors. Wall Street’s average target price is above $18, up 185% from Friday’s close. You make the call.
Write to Nicholas Jasinski at firstname.lastname@example.org