One of the largest global REITs, American Tower Corporation (AMT), is an owner and operator of wireless and broadcast communications infrastructure worldwide. Shares of AMT have soared 12.9% so far this year on elevated demand for its infrastructure. AMT has constructed nearly 2,000 new towers.

However, AMT’s  stock price has slumped 0.5% over the past month. Closing yesterday’s trading session at $253.37, AMT’s stock is trading nearly 7% below its 52-week high.

While accelerating 5G deployment and rising global mobile data usage should drive recurring cash flows for the company, its valuation and expenses have moved to extreme heights. As such, we think the stock might witness a pullback in coming months.

Click here to checkout our 5G Industry Report for 2021

Here is what we think could influence AMT’s performance in the near term:

Industry Tailwinds

5G technology has become a buzz word in the wireless telecommunications sector because  it promises to lead organizations, consumers, and governments to new frontiers of productivity and innovation. In fact,  accelerated 5G adoption should be  a catalyst for the long-term growth of network infrastructure companies. The transition to this next generation of wireless technology implies increasing infrastructure investment and incremental revenue potential for tower operators like AMT.

Also, because mobile data consumption has been increasing at a dramatic pace, it should drive robust capital investment within the wireless industry. These factors make us believe that spending on towers will remain robust. As such, AMT is well-positioned to benefit from this trend.

Mixed Financials and Profitability

AMT’s total revenue increased 8.3% year-over-year to $2.16 billion in the first quarter, ended March 31, 2021. Its adjusted EBITDA rose 13.3% from the year-ago value to $1.44 billion. The company reported $652 million in net income , representing a 55.8% improvement from the prior-year quarter. However, its  total operating expenses rose 5.9% year-over-year to $1.33 billion, while its other operating expenses rose 254.9% from its  year-ago value to $50.4 million.

The company’s 39.9% trailing-12-month EBIT margin  is 80.3% higher than the 22.1% industry average. AMT’s 5.3% and 0.2 respective return on total capital and asset turnover ratio are 198.7% and 66.1% higher than their industry averages. However, its 55.3% forward FFO payout ratio is 15.6% lower than the 65.5% industry average. Also, its 3.6% trailing-12-month AFFO yield is 27.8% lower than the 4.9% industry average of 4.9%.

Consensus Price Target Indicate Potential Upside

Of the 22 Wall Street analysts that have rated the stock, six rated it Strong Buy, 12 rated it Buy and four rated it Hold. Currently trading at $253.37, analysts expect the stock to hit $279.52 in the near term, indicating a 10.3% potential upside. The price target ranges from a low of $240 to a high of $325.

Stretched Valuation

In terms of trailing-12-month Price/Sales, AMT is currently trading at 13.68x, which is 96.5% higher than the 6.96x industry average. Also, its 28.95x trailing-12-month Price/Book is significantly higher than the 2x industry average. Furthermore,  the company’s 27.48x trailing-12-month Price/Cash flow is 64.2% higher than the 16.74x industry average.

POWR Ratings Reflect Uncertainty

AMT has an overall C rating of C, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. AMT has a C grade for Quality. This justifies the stock’s mixed profitability.

The company has a Momentum grade of D, reflective of its negative price returns over the past month.

However, it has a B grade for Sentiment. This is consistent with analysts’ expectations that its EPS will increase 28% in the current quarter.

In addition to the grades we’ve highlighted, one can check out additional AMT ratings for Sentiment, Growth and Value here. AMT is ranked #15 of 53 stocks in the D-rated REITs – Diversified industry.

Click here to view the top-rated stocks in the REITs – Diversified industry.

Bottom Line

Even though analysts expect AMT’s earnings to rise 37.7% this year, the company has an unimpressive earnings surprise history. AMT missed consensus EPS estimates in three of the trailing four quarters. While the rapid pace of 5G deployment and increasing mobile data traffic should bode well for the company in the long run, its lofty valuation and rising operational expenses could pose a risk for the stock in the near-term. So, we think investors should wait until these factors stabilize.

Click here to checkout our 5G Industry Report for 2021

AMT shares were unchanged in premarket trading Wednesday. Year-to-date, AMT has gained 13.47%, versus a 12.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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