Still Upside for American Tower
We maintain our Buy recommendation and the same price target for American Tower Corp. (AMT), a leading operator of wireless communications towers in the USA, Mexico and Brazil. Overall performance has been driven by substantial demand for more tower space to facilitate high-speed data services and mobile video, in particular 3G and WiMAX technologies.
The company continues to improve on several of its financial metric benchmarks and has sequentially outperformed its peer group on an EBITDA margin basis. Although a substantial level of debt remains concerning, management has provided a financial outlook that operating cash flow is likely to increase 15% in fiscal 2008. Our long-term view regarding the wireless tower industry remains positive, and we believe American Tower is well positioned to capitalize on emerging telecom network deployment opportunities.
American Tower is trading at 123.8x our estimated earnings for 2008, which represents a significant premium to both the forward P/E ratio for the S&P 500 and the peer group. However, we believe the share price remains supported by the strong correlation with overall demand for wireless services in the United States, Brazil and Mexico. The company is progressing with improved free cash flow and has provided an upwardly revised forecast for 2008.
Given the improved earnings opportunities for the company (EBITDA), the sustainability and recurring base of its revenue stream, and considering massive ongoing wireless data deployments, we maintain our Buy rating and the same valuation target of $48.50. This is based on a 2008 estimated EV/EBITDA multiple of 22.8x, closer to the peer group average.
Issues Keep Photronics a Sell
Photronics (PLAB) is an OEM of photomasks used by the semiconductor manufacturing industry in the fabrication of IC devices and LCD displays. In the October quarter, the top-line results were better than expected. Since foundries build-in their own photomasks in the larger geometries, the more advanced nodes are that much more important.
The company has strong technical development capabilities, and is experiencing growth in its 130nm and 90nm product lines. In the near term, this growth will not outshine a maturing legacy product and soft markets. Consequently, we rate shares of PLAB a Sell.
PLAB shares are currently trading at a 24.1x multiple of our fiscal 2008 earnings estimate (P/E). In our view, the increasing design activity leading into the fiscal year 2007, the growing qualification list, the transition to lower geometries and the company's cost control initiatives, will enable the firm to provide long-term financial growth.
With the share price dropping approximately 35% off the 52-week high, the successful completion of an equity offering and the continued pay-down of debt, we prefer to be on the sideline until the Flat Panel Display markets pick up.
