I'm biased. If a stock is highly priced but isn't growing blazingly fast, I instinctively don't like it. Give me growth or give me value -- or give me another investment.
If you happen to have such a stock in your portfolio that you want to sell, an opportune time is prior to the company's earnings release. Disappointing earnings on an overpriced stock can cause share prices to fall. With all of this in mind, here is one stock that you might want to consider selling soon.
A fairly strong castle
Crown Castle (NYS: CCI) owns wireless towers across the U.S., Puerto Rico, and Australia. Wireless tower operators like Crown Castle benefit from a straightforward business model: build, buy, or lease a tower and then collect rents from one or more customers from that point forward.
Wireless demand is surging with the proliferation of smartphones, tablets, and other wireless devices. To keep up with this demand, communications providers need more wireless towers or additional capacity from existing towers. This demand is great news for continued growth for Crown Castle and its competitors.
Crown Castle typically enters into long-term agreements with its customers. Some of its contracts have terms of up to 15 years and often have fixed escalation of rates. These types of arrangements provide the kind of predictable cash flow that businesses (and their investors) love.
The company continues to expand, particularly in the U.S. It recently bought NextG, the largest provider of outdoor distributed antenna systems (DAS). NextG's DAS network provides Crown Castle more capacity in areas that aren't typically covered by towers.
Crown Castle is also bidding to acquire the U.S. tower assets owned by T-Mobile. Other bidders include rival American Tower (NYS: AMT) and private equity companies. Should Crown Castle win the deal, it would increase its U.S. tower count by more than 30%.
But time to abdicate the crown
The company has a solid business model serving a growing market. So why sell Crown Castle?
First, the stock is priced to perfection. Crown Castle's trailing-12-month price-to-earnings ratio stands at 105. This is nearly twice American Tower's. While Crown Castle has a slightly larger U.S. market share, American Tower has a substantial edge internationally. Also, Crown Castle doesn't pay a dividend on its common stock. American Tower, which is organized as a real estate investment trust, sports a 1.2% dividend yield.
Second, the company isn't growing rapidly enough to warrant the high P/E multiple. High P/E ratios can sometimes be OK when companies have exceptionally fast growth. Crown Castle doesn't.
2011 revenue was up 8% compared to 2010. That's not bad, but neither is it overly impressive. American Tower grew revenue by 23% in 2011. Smaller competitor SBA Communications (NAS: SBAC) also grew revenue faster than Crown Castle in 2011.
The company had positive net income in 2011 for the first time in three years. That's better than SBA Communications, which lost money each of the last three years. American Tower, on the other hand, has been consistently profitable.
Part of Crown Castle's prior-year losses were due to early retirement of debt, so things aren't quite as bad as they might appear. The company still carries more than $8 billion of debt on its books, though. On a total debt-to-equity basis, Crown Castle doesn't look as strong as American Tower but is significantly better than SBA Communications.
Slower revenue growth, lower earnings, and more debt, yet Crown Castle is priced at a multiple nearly twice that of its main rival. It's time to give up the crown.
I'm actually not bearish on Crown Castle from an overall perspective. I like the company's business model. The wireless tower market seems to be a good place to be. My bias overrules my optimism, though. The stock is simply priced too high for its growth levels. American Tower is a better pick.
Crown Castle's next earnings announcement is scheduled for July 23. I don't think share prices will collapse because of the earnings release, but neither do I think there is justification for much upward movement. My view is to sell before then.
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At the time thisarticle was published Fool contributor Keith Speights has no positions in the stocks mentioned above. Motley Fool newsletter services have recommended buying shares of American Tower. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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