Crown Castle a Towering Buy
We maintain our Buy rating and the same valuation target Crown Castle International Corporation (CCI), a leading operator of wireless communications towers in the USA and Australia, following impressive financial results of its second quarter fiscal 2008, better than our estimates.
We believe recent weakness in the stock price is related to general global equity market weakness. Overall performance of the company will be driven by substantial demand for more tower space to facilitate high-speed data services, in particular 3G mobile technologies. The merger with Global Signal has provided better-than-expected cost synergies.
Although a substantial level of debt remains concerning, management guided that its recurring cash flow per share will increase by 25% during fiscal 2008. Our long-term view regarding the wireless tower industry remains positive and we believe the company is well-positioned to capitalize on emerging telecom network deployment opportunities.
Since Crown Castle is currently losing money with regard to net income, the stock is difficult to value on the basis of its P/E ratio. With respect to other selected valuation metrics, the stock is trading at a significant discount compared to its peers. According to our view, the wireless tower industry is likely to witness portentous growth over the next couple of years and, therefore, we believe the current valuation of Crown Castle does not adequately reflect its true valuation potential.
In considering massive ongoing wireless data deployments, we maintain our six-month target price of $45 which is based on a 2008 estimated EV/EBITDA multiple of 22.1x, still at a discount to the peer group average.
Peabody Taking Advantage
Peabody Energy Corp. (BTU) reported Q2-08 earnings from continuing operations of $0.89 per share, well above street consensus of $0.54 per share, on higher-than-expected per-ton prices, particularly from its Australian operations.
Its significant unpriced (open position) in 2009-2010 will further accelerate revenues, cash flows and earnings as Peabody locks in volumes at prices significantly higher than Q2-08 realizations in the PRB and Illinois Basin, as coal from these areas show continued strength through 2010. We are raising our '08 and '09 estimates from $2.67 to $3.15 per share and from $4.60 to $6.13 per share, respectively.
On July 21, BTU completed the $50 MM expansion project of its Wambo Coal Preparation Facility. This marked the last phase in a multi-year expansion of the company's Wambo facility in Australia. When fully ramped up, the Wambo complex can produce and aggregate 6.5 MM tons per year.
Peabody has industry-leading production capabilities in the basins it operates in and an open position for '09/'10 tonnage.
