Westwood fund manager Helfert calls in Single Best Trade

Data usage worldwide has exploded in recent years.

As an illustration of that trend, the global telecommunications market grew to $3 trillion in 2023 from $2.9 trillion in 2022, according to TechReport.

That’s a compounded annualized growth rate of 6.2%. And that trajectory is likely to continue, with TechReport citing a forecast of $3.8 trillion in 2027, an annualized growth rate of 5.8% from 2023.

Almost two-thirds (about 65%) of the global population uses the internet, so there is plenty of room for growth there.

Adrian Helfert, co-manager, Westwood Income Opportunity Fund

Westwood Holdings Group-TheStreet

Meanwhile, the number of smartphone mobile network subscriptions hit 7 billion globally last year (out of a total population of 8 billion), up 38% from 2018, according to data service Statista.

And it puts the 2027 forecast at $7.8 trillion, representing an 11% gain from 2023.

This massive use of data necessitates hordes of towers and other facilities that transmit the data.

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The three biggest U.S. owners of cellphone towers are American Tower  (AMT) , Crown Castle  (CCI,)  and SBA Communications  (SBAC) .

For more than 15 years, through late 2021, their share prices soared as they built out the nation’s network of cellphone towers.

But since then, the stocks have slumped, with much of the network now built out and interest rates rising. That makes the companies’ heavy debt loads more expensive.

Analysts bullish for tower owners

Still many experts remain bullish on the industry.

“We don’t think there will be any change to how critical these assets are to powering wireless networks,” wrote Morningstar analyst Matthew Dolgin.

“Annual escalators provide a minimal level of stable revenue growth,” he said. That’s thanks to carriers like AT&T paying rent to tower owners for antenna placement, he said.

“And towers have significant operating leverage. As data use continues to grow and networks get more stretched, locating equipment on more towers and upgrading equipment are primary solutions for carriers.”

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Adrian Helfert is interested in the business. He’s co-manager of the $513 million Westwood Income Opportunity Fund  (WWIAX) . Westwood had $17.2 billion under management as of March 31.

Helfert, a former marine combat medic (Gulf War I) and avid guitar player, recently discussed his top pick with It’s part of our “Single Best Trade” interview series.

So what is the Single Best Idea?

Crown Castle is a real estate investment trust that owns, operates and leases towers and other infrastructure for wireless communications. The Houston group is the second largest tower operator in the U.S.

What does Helfert like about Crown Castle?

Activist investor Elliot Investment Management took a significant stake in the company to focus and shake up management. That’s a needed exercise.

While the company faces lackluster growth projections and some roll-off of its Sprint business, the valuation reflects significant value for a more focused business.

Crown Castle is undergoing a full operational review. It’s focusing on the growthier segments of its business and reducing costs through workforce and office reductions.

The bear case for Crown Castle has been high capital expenditure requirements for a lower growth fiber business. This has weighed on cash flow and the ability to allocate growth capital to expanding the tower business.

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Some of the company’s already announced cost savings are capital expenditure savings. That benefits free cash flow, too.

Crown Castle is well-positioned to take advantage of increased data routing in a leaner, more cash-productive company.

Its review of the fiber business is likely to conclude with a sale or spinoff. That would result in a revaluation for Crown Castle to a higher pure-play tower multiple. It would also mean a more efficient use of capital for a higher-growth business.

What could go wrong?

Continued elevated interest rates are pressuring the entire REIT sector, And Crown Castle, with significant debt needs, is no different. A decline in interest rates would be a tailwind for this sector and company.

Also, a strategic review pushed by an activist can either unlock value or introduce operational uncertainty.

The author of this story owns shares of American Tower.

Related: Veteran fund manager sees world of pain coming for stocks

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