Shares of communications infrastructure company Crown Castle International (CCI) have been a turbulent ride over the past few months. The stock plunged more than 25% from peak to trough before rallying modestly to around $172 and change per share — where CCI stock currently sits today.
Undoubtedly, Crown Castle seems like a great place to shelter from inflation and the coming economic slowdown. The bountiful 3.41% dividend yield, 0.59 beta, and wealth of telecom assets will be propelled higher by longer-term secular trends. That said, nearer-term economic headwinds, hefty capital expenditures (not a good thing as rates rise), and a rich valuation could limit upside.
Though Crown Castle has all the makings of a wonderful company, but the 51.3 times trailing earnings multiple is excessive. Further, longer-term secular tailwinds may be more than offset by near-term headwinds that could persist for longer than 18 months.
Sure, Crown Castle is the go-to investment for those bullish on the future of small-cell technology. But for patient investors, a better entry point could be lying in the second half of 2022.
For now, I am bearish on the stock.
On TipRanks, CCI scores a 3 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to underperform the broader market.
Crown Castle: Tower Strength Powers Mild First-Quarter Beat
Crown Castle’s latest quarter was solid, with tower growth once again powering the results. As the company pushes to double its small cells next year, the firm risks cannibalizing its towers business, which has been standing tall as of late.
At the same time, Crown Castle could trump its rivals, as it’s very confident in the future of small cell tech. Otherwise, they wouldn’t be investing so heavily in rolling out the infrastructure that could accompany greater rewards than towers while future-proofing the firm’s asset base.
I view Crown as somewhat more future-proof than its rivals. Though a premium is warranted, the current premier price tag seems a tad too hefty.
Further, the real risk is when small cells will be ready for prime time. Is it ahead of its time, with certain consumers delaying purchases of 5G-enabled devices in anticipation of tough times? Perhaps. Regardless, small cells represent a vital next frontier. Even with a recession on the horizon, Crown is smart to continue betting big on the costly endeavor that could pay major dividends over the longer run.
Crown’s operating leverage has been applaud-worthy. The small-cell push is a riskier undertaking. But there’s always the rock-solid tower business to fall back on. In a way, the company is doing a fine job of playing both offense and defense.
The Rich Valuation
Crown Castle stock hasn’t ever been what most value-conscious investors would consider cheap. As the market sell-off intensifies, Crown Castle may settle in a range that makes more sense.
At 11.3 times sales, CCI stock is pricier than many of the fallen hyper-growth stocks. While the company still has many big days of double-digit sales growth ahead of it (and earnings growth), it’s the high level of growth predictability of cash flows that many are paying up for.
Eventually, we’ll reach a point where hyper-growth stocks with uncertain trajectories will be worth more than firms with milder growth and predictable roadmaps. When that will be is anyone’s guess. In any case, Crown Castle stock seems like it could be at risk of considerable downside once the tides turn and investors feel more comfortable rolling the dice with a freshly-crashed hyper-growth stocks.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CCI stock comes in as a Moderate Buy. Out of eight analyst ratings, there are six Buy recommendations, one Hold recommendation, and one Sell recommendation.
The average Crown Castle International price target is $198.88, implying an upside of 15.4%. Analyst price targets range from a low of $180 per share to a high of $215 per share.
The Bottom Line on Crown Castle International
Crown Castle is a great business, but its valuation remains hard to get behind amid the market’s valuation reset. Small cells are an intriguing technology, and while Crown is one of a few unique firms with pockets deep enough to get really aggressive on the technology, investors may wish to temper their expectations. Especially, given how much is already baked into the share price.
For now, I’m taking a rain check on the name. It may shed more of its defensive characteristics as we inch closer to the dreaded economic slowdown that has many investors becoming more selective with their stock purchases.
Read full Disclosure
