American Tower Society (NYSE: AMT) is a stock you can’t go wrong with, especially during inflation. Its financial fundamentals, as well as the essential nature of real estate in the critical telecommunications industry, make it a safe bet to place. This stock is a buy, especially given the macro conditions the market is facing.
American Tower Corporation is a large global player in the field of telecommunications real estate which is classified under the real estate investment trust (REIT) structure. The company owns, operates and develops real estate projects critical to the global markets communications ecosystem.
With its market capitalization of $117 billion, at the end of April 2022, AMT is the largest REIT in the world, with nearly 200,000 communication sites in North America, Latin America, Europe, Asia and Africa. Considering its substantial size and dynamic scale of operations, American Tower Corporation is ranked 410 in the list of Fortune 500 companies.
The potential of REITs in times of inflation
During periods when macroeconomic conditions lead to inflations, players in the investment fields tend to revise their valuation methods and investment criteria. The goal is usually to outpace the rate of inflation, while reducing disposable incomes and constraining consumer budgets. The stock market in particular had been an inescapable choice to act as a safety cushion during periods of inflation. Indeed, despite the typical volatility observed among equities, long-term appreciation protects investors from a monetary devaluation of their long-term savings. Moreover, companies tend to increase their prices in such economic conditions, which makes stocks similar to commodities, which increase in price throughout inflation.
However, the typical stock is still likely to take a hit in such macroeconomic conditions, given the impact on profitability resulting from inflation. With declining disposable incomes and economic uncertainty, the market is much more reluctant to spend on non-essential industries. These conditions indicate that investing in common stock remains a risky option for market participants.
Alternatively, REITs are seen as much more viable investment options to consider in times of inflation, as opposed to common stocks. Regular stocks, especially those of companies that sell non-essential products or services, see their prices fall due to reduced profitability. Alternatively, REITs experience high growth, significantly outpacing the consumer price index on an annual basis. This was observed consistently from the 2000s to 2020, except for only three years:
As can be seen from the data depicted above, REITs are a particularly viable option to consider in times of inflation, given their dividend growth that far outpaces the consumer price index.
In a similar study, the returns of standard equities (measured using the S&P 500 index as a standard) were compared to those of REITs, during periods of different levels of inflation. The study classified inflation below 2.5% as “low inflation”, between 2.5% and 6.9% as “moderate inflation”, and above 6.9% as “high inflation”. This is shown below:
As the numbers above show, REITs consistently outperform the S&P 500 Index during periods of moderate and high inflation. Although the S&P index generated higher price returns, REITs overall outperformed given their substantial earnings during this period. Price returns typically decline for REITs to dramatically low levels during periods of high inflation, but dividend payments experience huge growth.
Additionally, the asset-based business model of REITs like AMT gives the company a fair value advantage during times of rising costs. In the case of AMT, which deals in communication real estate, it is potentially unlikely that the company’s profitability will experience a significant impact, given the essential nature of its communication real estate assets. The communications ecosystem is critical to the functioning of the global order and is one of the few industries that will see consistent demand, even during times of high inflation. Removing telecommunications is never an option considered by market players, despite macroeconomic tensions.
One of the reasons AMT is a good REIT option to pin hopes on during times of high inflation is its financial performance, which makes it a prime candidate to consider generating higher incomes in an environment of rising market costs. A high income REIT stock could correct the decline in personal disposable income.
In its latest earnings report, which was for the first quarter of FY22, AMT beat analysts’ earnings expectations and achieved quarterly FFO of $2.55 per share. As a result, the company’s bottom line improved nearly 4% year over year. This growth in FFO is a consistent feature of AMT and has been seen since the stock’s early years:
During a period of high inflation, such a steady growth trend, despite macroeconomic shocks such as the COVID-19 epidemic and the disruptions between Ukraine and Russia, is considered a very favorable investment option for consider in times of high inflation. One of the reasons for this is the increase in interest rates that accompanies periods of high inflation, which reduces the present value of future cash flows. For this reason, high growth stocks are considered favorable investment options.
In addition to beating analysts’ FFO expectations, another area where AMT shone was its revenue. The company posted quarterly revenue of $2.66 billion, 2% higher than Zacks’ consensus estimate. Following this outstanding performance, the company’s revenue jumped more than 23%, significantly increasing its long-term potential, further adding to the reasons why the stock is an optimal choice during periods of inflation. .
AMT Assessment Rating
AMT appears to be a high value stock, which I believe is currently not reflected in its current price of $241. Given its upside and a looming high inflationary environment, I believe the stock is undervalued and will likely see its price rise as its investment viability becomes more apparent.
According to analyst growth forecasts, AMT outperforms the specialty REIT industry by 0.4%, but lags the broader US stock market. However, as described above, this is due to the fundamental difference between REITs and common stocks, especially in times of moderate and high inflation.
What is more remarkable in the case of AMT is its funds from operations (FFO) and the growth trend it has experienced over the years. FFO is a much more appropriate measure in the valuation of REITs, compared to EPS, as it eliminates the impacts of depreciation, amortization, and gains and losses on asset sales. Based on this, the view that AMT is undervalued is reinforced:
Based on these valuation measures, I strongly believe that AMT is significantly undervalued, especially given the potential increase in its demand as higher levels of inflation hit the US economy.
American Tower’s most significant risk that could impact its financial viability is the threat of customer consolidation. As key players in the communications industry embark on consolidation strategies such as mergers or strategic partnerships, duplication of services would be eliminated, potentially reducing demand for the company’s assets. AMT. If such a trend gains momentum, AMT’s earnings could break its growth trend and profitability would become increasingly difficult to sustain.
Similarly, consolidation among corporate customers could lead to modernization of communications infrastructure, which could result in the aging of AMT’s assets. This, too, could lead skeptics to wonder whether or not the company could continue to grow if it sees a reduction in demand to such a degree. In the event that such consolidations occur, many customers may choose to terminate their leases and agreements with American Tower, which would directly impact its contractual revenue stream.
To avoid exposure to this significant risk, AMT should strategically focus on innovation and determine how best to add value to its customers, despite a potential wave of consolidations. Such innovation could be spurred by the research and development of new assets in the communications ecosystem that are superior to those of competitors in terms of quality and price.
AMT is a great REIT stock that you don’t want to miss, given the looming inflationary pressures affecting the global economy. REITs outperform common stocks in terms of earnings, during periods of moderate and high inflation, and AMT presents the most robust profile in the broader REIT market. The company’s financials, including revenue, earnings and FFO per share, point to a remarkable growth trend, making it ideal for investors in times of inflation. This view is reinforced by the consistency of its growth which has proven immune to macroeconomic shocks due to COVID-19 and the Russian invasion of Ukraine, given the essential nature of AMT’s assets for the global communications industry.