These 2 wireless tower stocks could 'beat and raise' but issues linger – TD Cowen

TD Cowen analysts previewed the wireless tower sector ahead of second-quarter earnings results. While the analysts see modest beats and raises from American Tower (NYSE: AMT ) and SBA Communications (NASDAQ: SBAC ) they expect the series of headwinds the sector is facing to linger. Meanwhile, the analysts view the sell-off in the sector following a recent WSJ article suggesting AT&T (NYSE: T ) and Verizon (NYSE: VZ ) could be responsible for toxic lead-encased cables throughout their networks as “overdone.”

The analyst highlights that since the last earnings season kicked off, AMT is down 11%, SBAC is down 15%, and Crown Castle (NYSE: CCI ) is down 18%. This occurred as the iShares U.S. Real Estate ETF (NYSE: IYR ) rose 4% and the S&P 500 rose 8%.

The analysts highlight that the prevailing challenges in the sector include uncertainties around Dish's (NASDAQ: DISH ) post-2023 achievements and financial situation, the uncertain 5G "halftime pause" for carriers struggling to monetize 5G, the Federal Reserve's indication of higher interest rates, balance sheet optimization limitations, the reversal of the "long towers short data centers" trend, and recent concerns about toxic lead-encased cables in AT&T and Verizon networks, leading to a 5% decline in tower stocks.

Although the analyst considers the recent sell-off due to concerns about toxic lead to be excessive, they think other lingering uncertainties will continue to cast a shadow.

“To that end, while we believe 2Q23 may generally shape up well for the TowerCo’s, with AMT and SBAC set up for potential beat/raises around U.S. New Leasings, we may have to then wait until next February, when they announce (potentially weak) 2024 initial guidance, as our next clearing event for better answers around 5G carrier spend and Dish,” the analysts commented. “The stocks could work beforehand in the face of recessionary concerns as Towers will be seen as defensive.”

On the telco toxic lead issues, the analysts highlight that the situation remains uncertain with numerous unknown factors, making it challenging to quantify. However, the market capitalization losses amount to $36.5B for Telcos and $8.3B for Towers, which they believe surpasses the potential liabilities. Political disputes, civil lawsuits, and State Attorney General lawsuits are expected, even if Republicans win in 2024, as they cannot halt the state and civil suits. The resolution of these issues will take time, similar to the ongoing lead-water issue since 1986, which will not be resolved until 2038. The tower companies, AT&T, and Verizon deny responsibility, so the analysts anticipate they will not curtail capital expenditures during the process as “(1) they would wait until more information and progress on the matter materializes, and (2) curtailing spending could suggest admission of culpability through the ongoing process.”

The firm maintains Outperform rating on AMT, CCI, and SBAC, with price targets of $271, $149, and $329, respectively.