CCI - Crown Castle: Buy The Market Bottom

2023-12-12 02:10:57 ET

Summary

• Crown Castle's Q3 2023 financial performance shows resilience and growth in tower organic revenue, supported by small cell node delivery.
• The company projects robust growth for 2024, with diversified revenue streams and strategic investments in fiber and tower infrastructure.
• Technical analysis suggests a solid bottom formation in the stock price, indicating a potential long-term rally.

Crown Castle Inc.'s ( CCI ) financial performance in Q3 2023 portrays the company as resilient and strategically well-placed in the telecommunications infrastructure sector. CEO Jay Brown highlighted the firm's consistent outlook for the full year, which was marked by noticeable growth in tower organic revenue. This was further supported by a substantial delivery of small cell nodes, underscoring the company's dedication to expanding its infrastructure. This article delves into financial results from Q3 2023 earnings and technical analysis of the stock to identify potential investment opportunities. Observations indicate that the stock price is recovering from significant support levels, suggesting an upward trend to continue.

Financial Performance

Crown Castle projects a robust growth trajectory for the following year. The forecast for 2024 includes a 4.5% organic growth from towers, a significant 13% from small cells, with plans to add approximately 14,000 small cell nodes, and a 3% growth from fiber solutions. This diversified growth across different segments is expected to yield a consolidated organic revenue growth of 5%. Site rental revenues grew modestly by 1% year-over-year despite challenges such as decreases in straight-lined revenues and amortization of prepaid rent. However, net income for Q3 2023 saw a decline to $265 million from $419 million in Q3 2022, partly due to charges related to restructuring plans, as shown in the chart below.

Adjusted EBITDA for the quarter was slightly down at $1.05 billion compared to $1.08 billion in Q3 2022. The Adjusted Funds From Operations (AFFO) also decreased primarily due to lower Adjusted EBITDA. Capital expenditures were $347 million, with a considerable portion allocated to expanding the fiber and tower infrastructure, as shown in the chart below. Moreover, the company continued its shareholder-friendly activities, paying out dividends of $680 million, marking a 6.5% increase per share compared to the previous year. Additionally, Crown Castle has strategically managed its debt profile, repaying a significant amount of its senior unsecured notes, and maintaining substantial liquidity.

Crown Castle's financial projections for discretionary capital expenditures and prepaid rent additions highlight a significant investment in expanding its fiber and tower infrastructure. In 2023, the company plans to allocate $1.3 to $1.4 billion towards discretionary capital expenditures, with the majority, between $1.1 and $1.2 billion, directed to the fiber sector, $200 million to towers, and $400 million in prepaid rent additions. For 2024, these expenditures are expected to rise to $1.5 to $1.6 billion, driven by a substantial increase in small cell deployments, expected to grow by 40% to around 14,000 nodes, while capital expenditure is only set to increase by about 20%, demonstrating a more efficient use of capital in growth initiatives.

Overall, Crown Castle's financial outlook for 2024, with its diversified and strategic investments across various segments, positions the company for a promising future in the telecommunications infrastructure sector. Despite facing challenges in 2023, such as a decline in net income and a slight drop in Adjusted EBITDA, the company's significant commitment to expanding its fiber and tower infrastructure, coupled with its shareholder-friendly activities, demonstrates a balanced approach towards growth and financial stability. This strategic direction, underpinned by a robust capital expenditure plan and an efficient use of resources, suggests Crown Castle is well-equipped to navigate the dynamic telecom landscape and enhance shareholder value in the years ahead.

Emergence of Solid Bottom Formation

The monthly chart below paints a robustly bullish technical picture for Crown Castle, demonstrating a significant and consistent upward trend in its stock price. Following the 2008 low of $6.12, the stock has exhibited a solid bullish momentum, steadily climbing to reach an all-time high of $193.96 in December 2021. This sustained growth trajectory highlights the stock's resilience and strong market performance.

This notable turnaround in 2008 was primarily attributable to strategic business decisions and industry trends. The 2008 low reflected the broader market downturn due to the global financial crisis, negatively impacting many sectors, including real estate and infrastructure-related stocks. However, the subsequent rise in its stock price was driven by the company's successful pivot towards the burgeoning telecommunications infrastructure market, particularly its investment in cell towers and small cell technology, which became increasingly vital due to the explosive growth in mobile data usage and the advent of 5G technology. This shift, coupled with strong financial management and a growing demand for wireless communication infrastructure, positioned Crown Castle to capitalize on the evolving digital landscape, leading to its record highs in 2021.

However, the stock experienced a downward correction due to highly overbought conditions, eventually finding robust support. The 61.8% Fibonacci retracement level reinforces this support, calculated from the 2008 low of $6.12 to the record high of $193.95. The stock's decline halted at $84.72 in October 2023, aligning closely with the 61.8% Fibonacci retracement level of $77.81. The critical reversal at this point in October 2023 suggests the formation of a market bottom. The subsequent strong candle in November 2023 further solidifies this base, laying the groundwork for a potential long-term rally. Notably, the RSI is also making a turnaround from these low levels, a pattern not seen since the 2008 lows, which may indicate another significant market bottom.

Key Action for Investors

To delve deeper into this optimistic perspective, the weekly chart below sheds light on the price movements post-establishment of the market bottom. Notably, the weekly candlestick pattern marked a significant reversal at $84.72, with subsequent robust weekly candles underscoring the strength in price. The RSI also reflects a rebound from highly oversold conditions, suggesting that the stock price may continue its upward trajectory following a brief pullback.

The short-term daily chart reveals a prominent inverted head and shoulders pattern, with the head at $84.72 and the shoulders at $94.41 and $93.73, respectively. This bullish formation further bolsters the positive market outlook. However, it's important to note that the RSI is currently in the overbought zone in the daily chart, and the recent daily candlestick patterns hint at an impending short-term correction. This potential pullback should be considered an attractive investment opportunity for long-term investors. Those considering investment might target an entry point of around $100, anticipating a significant rally in Crown Castle.

Market Risks

Crown Castle faces risks related to market demand and technological changes. The company’s strategy of heavy investment in small cells and fiber solutions, while indicative of growth, hinges on the continuous expansion and evolution of the telecom industry. Technological advancements or regulatory changes could significantly impact revenue streams. Moreover, the large-scale deployment of capital, although reflecting a current solid financial position, might limit flexibility in responding to unforeseen market changes. The decline in net income and the downturn in Adjusted EBITDA and AFFO highlight potential vulnerabilities to economic fluctuations and interest rate changes.

From a technical perspective, the stock's correction in 2023, following an overbought condition, illustrates its susceptibility to market sentiments and broader economic conditions. While Fibonacci retracement levels and RSI suggest a potential rally, they are based on past performance and do not guarantee future results. If the monthly close falls below $77.81, it will reverse the bullish perspective and trigger a substantial decline.

Bottom Line

In conclusion, Crown Castle demonstrates strategic foresight in the telecommunications infrastructure sector. Despite facing some challenges, including a decline in net income and a slight dip in Adjusted EBITDA in Q3 2023, the company's commitment to expanding its fiber and tower infrastructure and shareholder-friendly activities signals a balanced approach towards sustainable growth and financial stability. The financial forecasts for 2024, with anticipated strong growth across various segments, reinforce the company's robust position in the market. The focus on diversifying its revenue streams, mainly through significant investments in small cells and fiber solutions, suggests a proactive strategy to capitalize on the evolving telecom landscape.

From a technical viewpoint, the stock price rebounded from significant support levels at the 61.8% Fibonacci retracement mark. This rebound and the critical reversal observed at this level suggest the formation of a robust market bottom. The pronounced bullish price action in November 2023 further reinforces this positive outlook. However, a short-term correction appears imminent, allowing investors to consider buying Crown Castle stock during the upcoming market dip, particularly around the $100-$110 price range.

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