Tower companies likely enjoyed solid—if not spectacular—Q2, analysts say

The tower market likely enjoyed a modestly successful second quarter, multiple analysts wrote Friday morning, as wireless network operators gradually stepped up their network investments.

And this bodes well for the entire segment as it prepares to enter the 5G era and as carriers begin to put new airwaves to use.

“We remain positive on tower stocks coming into the 2Q print as we believe carrier spending has been broadly stable-to-improving (against a weak backdrop), while plans are being laid for the extended build cycle set to start in earnest in 2018,” Guggenheim’s Robert Gutman wrote in a note to investors ahead of second-quarter earnings reports. “We expect 2Q reports to show 1) steady amendment activity driven by increasing capacity needs and 2) increasing activity by T-Mobile, steady activity by Verizon, and the expectation of increasing spending by AT&T in 2H17 and Sprint potentially in 2018.”

Analysts at Deutsche Bank agreed, describing the tower market as “the best positioned sub-sector” in its telecom coverage area. Deutsche Bank raised its forecasts for 2018 and beyond for the segment due largely to AT&T’s FirstNet buildout.

“Net net, our estimates remain ahead of consensus (for towers), and we continue to believe the stocks should grind higher as estimates will in upcoming periods,” Matthew Niknam of Deutsche Bank wrote. “We look for updates on both ongoing network activity trends from carriers, as well as color on more 2018-heavy drivers like FirstNet and T-Mobile’s 600 MHz build.”

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The launch of unlimited data plans by all four major U.S. carriers over the last year has goosed data consumption—which was already soaring—prompting operators to ramp up capex spending to increase capacity needs and meet demand. Meanwhile, operators have increasingly pursued technologies and strategies such as carrier aggregation, VoLTE and cell splitting to use spectrum more efficiently and to accelerate data transmissions.

Wireless industry capex sank 20% from 2014 to 2016, according to Guggenheim, due largely to belt-tightening from AT&T and Sprint. But AT&T will begin to deploy service on its 60 MHz spectrum next year, and it is expected to begin deploying the FirstNet offering in the first half of next year. T-Mobile is in the process of rolling out service on the 600 MHz airwaves it won during the FCC’s incentive auction that wrapped up several weeks ago.

But tower investors are likely to be wary of the market given the flurry of M&A rumors in recent months. Sprint has long pursued a tie-up with T-Mobile, of course, but the No. 4 U.S. carrier has also spoken with cable companies Charter and Comcast about a potential wireless deal. And Dish Network continues to sit on its significant pile of spectrum as it looks for an entry into the wireless segment.

Regardless of the players, a cross-industry marriage could actually benefit tower companies, Guggenheim said, spurring increased investment from the wireless network operator involved. Conversely, a move to consolidate the market via a merger of two wireless carriers would be bad news for towers.

“Many of Sprint’s and T-Mobile’s sites are within proximity of each other—even if they are not located on the same tower. And, so, we believe the risk (of a merger) is closer to 40,000 cell sites—or a little more than a third of the combined revenues from the two companies,” Gutnam wrote. “While we believe there could be synergies in a horizontal merger between wireless players—we see a more compelling argument for vertical integration on a strategic and economic basis—and most importantly from the tower perspective—we believe this would lead to incremental network development.”