The demand for mobile data is creating infrastructure opportunities, which investors can take advantage of throughout 2016.
Consider that telecommunication companies are busy investing in wireless infrastructure to expand their coverage and speed up their networks, and that the biggest beneficiaries of this trend are tower companies, says Richard Elmslie, a founder and co-CEO of RARE Infrastructure in Sydney, Australia. His firm manages manages the Renaissance Global Infrastructure Fund.
As the U.S. telco market migrates from 3G to 4G networks, he explains, companies such as Verizon, AT&T and Sprint will continue to spend on developing cell sites, which are towers that hold cellular transmission and reception equipment. “[They’re] spending tremendous amounts of money putting equipment on [such] towers. And, the tower companies are renting […] to these entities for seven- to 10-year periods. That phenomenon is going to continue and will generate a lot of cash.”
Currently, Elmslie is focusing on tower companies like Crown Castle, SBA Communications and American Towers — the three largest in the United States. American Towers has some business in India, which is moving from 2G to 3G networks. “[India] has a middle-class population of close to half of a billion people and it’s growing, and most people have phones.”
Elmslie’s also bullish on U.S. rail businesses. “The rail businesses in the United States, on a long-term basis, are cheap. Their full values [aren’t] being reflected in the current market.” Further, it could take a while for these true values to be reflected. “Railroads really only compete with roads, and rail is the much cheaper, greener option. So we like these companies. They [also] had some merger and takeover announcements recently, [so] even rail operators are seeing other operators as quite cheap.”
Elmslie is overweight in both tower and U.S. rail companies, and he has diversified by investing across different geographies. “If you look at our main strategy, we continue to have a weighting of about 40% in the U.S. and Canada, with about 31% in Western Europe.”
In Australia, much of the infrastructure market is fully valued because it has attracted so many investors, he notes. “That’s because retail investors like the yield. […] And, outside of mining companies and banks, Australian institutional investors don’t have very many other solid cash flow companies to invest in.”
When looking for opportunities, make sure you know how to assess when infrastructure stocks are trading at good values, suggests Elmslie. One example of a good find last year was Pennon Group, an environmental utility business located in the U.K. “For five months [last year] it was selling at $860. [But] in September, it fell to about $720, [and] we went in and bought because we were able to see [that] was very good value. It’s now trading above $800. I think you’ll get more opportunities like this because this market is very volatile.”
Also, you should understand that the infrastructure sector can be divided into two groups:
- stocks tied to railroads, toll roads, airports and ports; and
- stocks tied to essential services such as gas, electricity and water.
These two groups perform differently, says Elmslie. “[While] infrastructure stocks tend to be more influenced by GDP, utility stocks are [less so].” That’s why the utilities group provides more stable revenue across up and down economic cycles.
When the economy is performing poorly, he explains, people tend to switch to different forms of transportation, thereby cutting their road use. That can cause a drop in volume for toll roads, for example, even though there’s certainty in toll-road pricing due to long-term contracts with government entities. With utilities, people typically don’t cut their use as dramatically, and contracts regulate both volume and pricing.
That’s why Elmslie primarily seeks companies that offer essential services and have simple structures. But, he invests in both areas of infrastructure to ensure he has a balanced portfolio across all economic cycles.