Here’s Why American Tower (AMT) Q2 Earnings Could Disappoint

American Tower Corp. AMT is scheduled to release second-quarter 2018 results on Jul 31, before the opening bell. The company’s results will likely reflect year-over-year rise in funds from operations (FFO) per share and revenues.

In the last reported quarter, this real estate investment trust (REIT) missed its FFO estimates. Nonetheless, total revenues of $1,741.8 million increased 7.8% year over year, beating the Zacks Consensus Estimate of $1,737 million.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in two occasions and missed in the other two. It delivered an average positive surprise of 0.22% during this period. The graph below depicts this surprise history:

Let’s see how things are shaping up prior to this announcement.

Factors at Play

American Tower is expected to benefit from increased investment of wireless carriers in 4G LTE and 5G networks in the United States. Further, the company’s tower buyouts in a bid to foray into emerging markets and long-term tower leases with major wireless carriers lend it a competitive edge over peers. In fact, the Zacks Consensus Estimate for gross margin from its U.S operations is pegged at $744 million and reflects a sequential increase of 4.6% as compared to the previous-quarter reported tally.

However, the accelerated consolidation in the Indian cellular market is expected to have impacted the company’s overall performance in the April-June quarter. While this has impacted the company’s churn rate in the Indian markets, property revenues are expected to have been suppressed in Q2. In the previous quarter, the company reported property revenues of $1.71 billion. The Zacks Consensus Estimate for second quarter is pegged at $1.72 billion, reflecting a slight increase of 0.6%.

With a substantially leveraged balance sheet, rising interest rates magnifies problems for the company. This is because American Tower heavily relies on debt to continuously invest in built-outs and site acquisitions. In fact, outstanding long-term debt at the end of the prior quarter was $18,568.8 million. Such high-debt levels may impede sufficient cash-flow generation and drag bottom-line performance, moving ahead.

Further, American Tower is rapidly expanding in the international markets, especially in the emerging Asian and Latin American markets. Although this geographic diversification will boost revenues, it might jeopardize the bottom line at the same time. Tower operations in the emerging markets are not as profitable as that in the mature U.S. market. In fact, the Zacks Consensus Estimate for gross margins from Asian operations is pegged at $25 million, indicates a sequential decline of 3.8% as compared to its previously reported numbers.

American Tower continues to face fierce competition in the global wireless tower market from large incumbents like Crown Castle International Corp. CCI and SBA Communications Corp. SBAC. This, again, impacts its pricing power.

Lastly, American Tower’s activities during the June-end quarter were inadequate to gain analyst confidence. In fact, the Zacks Consensus Estimate for FFO per share of $1.78 for Q2 reflects a downward revision of 1.1% over the past month, underlining bearish analyst sentiment on the stock.

Earnings Whispers

Our proven model does not conclusively show that American Tower is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat estimates. Unfortunately, that is not the case here as elaborated below.

You can uncover the best stocks to buy or sell before they’re reported with the Earnings ESP Filter.

Earnings ESP: The company has an Earnings ESP of -0.74%

Zacks Rank: American Tower has a Zacks Rank #4 (Sell).

Key Pick

Boston Properties, Inc. BXP, which has the right combination of elements to deliver a positive surprise with respect to FFO per share in Q2, is slated to report its figures tomorrow. It has an Earnings ESP of +0.03% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

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