Shares of communication infrastructure company Crown Castle International (CCI) have been holding their own rather well amid the recent bout of market volatility. Down around 13% from its all-time high of around $208 and change per share, CCI is keeping pace with the S&P 500. When compared to the Nasdaq 100, which is down 23% from its peak, that’s a good thing.
Despite the modest pullback in CCI and its defensive nature, shares still seem somewhat stretched. Though the 3.2% dividend yield is appealing at a time like this, the company’s small-cell rollout will not come cheap, especially with rates poised to rise at a rapid pace to curb inflation in its tracks.
Undoubtedly, Crown Castle sees small cells as a key area to improve the 5G networks of the future. As of late, growth in the small cell business has been weak, to say the least. Moving ahead, Crown Castle still expects to put its foot on the gas on small cells going into next year. While the long-term opportunity is still robust, the medium-term outlook may be far less rewarding than many expect.
At writing, shares of CCI trade at 54.1 times trailing earnings, with a 12.1 times sales multiple. That’s wildly expensive for such a capital-intensive business. Though Crown Castle is likely right on the money to shift gears towards small cells from towers, I do not expect such efforts to pay off overnight. For now, I am neutral on CCI stock, primarily due to valuation concerns.
Crown Castle Stock’s Low Beta and Large Dividend: The Main Attraction
2022 has been nothing short of a volatility storm. With a mere 0.54 beta and a 3.3% dividend yield, CCI stock may be seen as some sort of safe haven. While demand for more defensive dividend stocks has picked up of late, it’s noteworthy that CCI isn’t exactly the best place to be if a severe recession is, in fact, in the cards for 2023 or 2024.
During the Great Financial Crisis (GFC), CCI stock got obliterated, shedding around 70% of its value from peak to trough. Though CCI stock eventually recovered quickly in the following years, things seemed scary for the firm that wasn’t as defensive as it appeared.
These days, Crown Castle is spending at a fierce pace. Fiber and small cell investments do not come cheap. Though Crown Castle could find itself a leader in the small cell space over the next decade, it will be a choppy road from here as it looks to build its moat that could prove difficult for rivals to jump over.
Given ample spending over the years (most of which has gone into Fiber) and a handful of acquisitions, it should come as no surprise to see a considerable sum of debt weighing down Crown Castle’s balance sheet. Aggressive spending in Fiber and small cells could prove risky over the nearer term, especially given how robust Crown Castle’s tower business has been. Despite the capital spending and debt load, the dividend payout looks more than safe.
Are Small Cells the Right Way to Go?
Indeed, the next frontier for 5G may lie in small cells, as opposed to towers. However, the real question is whether Crown Castle is a bit ahead of itself. Certainly, it’s nice to have a head start versus rivals. However, overspending on such initiatives could weigh on operating margins. With higher rates and greater odds of falling into a recession over the medium term, that’s not a good thing.
For now, the small cell business isn’t looking too hot. That said, it’s far too soon to tell whether Crown Castle is wrong to devote investment towards the area rather than doubling down on towers. Investors have plenty of reason to give management the benefit of the doubt. Nonetheless, it could take some time for such forward-looking projects to pay real dividends.
Wall Street’s Take
Turning to Wall Street, CCI stock comes in as a Strong Buy based on six unanimous Buy ratings.
The average Crown Castle International price target is $210, implying upside potential of 15.7%. Analyst price targets range from a low of $202.00 per share to a high of $219.00 per share.
The Bottom Line on Crown Castle Stock
Even after a recent correction, shares of Crown Castle still seem a tad rich. The small cell business could continue to drag its feet through the year, but I do think it’s the right place to be investing in. Undoubtedly, the company could find itself with a nice lead as it looks to improve the quality and availability of 5G across the states.
For now, Wall Street remains incredibly bullish on CCI stock. Whether it can hold its own relative to the S&P 500 remains to be seen. In any case, Crown Castle is the go-to bet if you believe small cells are the future of 5G.
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