Elliot Management Discloses Major Stake in AT&T (T)

Shares of AT&T T soared today after active investor Elliot Management Corp disclosed it owns a $3.2 billion stake in the telecommunications giant; the telecom giant jumped as much as 7% in premarket trading, and has gained about 2% in intraday.

Active investors like Elliot Management take large stakes in companies that they believe are undervalued and then leverage their new position to institute the changes they would like to see in the company. However, unlike its peers, Elliot has the size and influence to buy entire companies instead of pushing for changes as a minority stake holder. The hedge fund recently bought health care tech company Athenahealth, and is in the works of acquiring the manufacturing company Arconic ARNC.

Elliot Weighs in on AT&T’s Operations

The active investor sent a letter to the company expressing their ideas to help improve AT&T. Elliot argued for ways to improve its business and realize historic increases in value, raising concerns about AT&T’s recent acquisition of Time Warner and stating that “AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner.” The New York-based hedge fund also wrote in the letter that it is seeking seats on the company’s board and further challenged AT&T to sharpen its focus on its successful wireless business and trim unnecessary assets. Elliot was also critical about the company’s acquisition of DirecTV.

AT&T’s chief executive Randall Stephenson made the company one of the biggest US media players by buying DirecTV and Time Warner over the past few years. The acquisitions, however, left the company with $170 billion in net debt by the end of 2018. The letter blamed AT&T’s underperformance over the past decade on Stephenson’s acquisition strategy, stating “AT&T has transformed itself into a sprawling collection of businesses battling well-funded competitors, in new markets, with different regulations, and saddled with the financial repercussions of its choices.”

AT&T shares hit a multiyear low in December as investors were unsure about the company’s debt load sustainability. The telecommunications giant spent the past year fortifying its balance sheet by selling off certain assets like its stake in streaming service Hulu, as well as ownership of WarnerMedia’s new Manhattan headquarters.

In response to Elliot’s letter, AT&T said its management team and Board of Directors “maintain a regular and open dialogue with shareholders and will review Elliot Management’s perspectives in the context of the company’s business strategy.” They also expressed that the focused and successful execution of their current strategy is the best path to take moving forward to provide long-term value for shareholders.

Bottom Line

AT&T is sitting at a Zacks Rank #3 (Hold) and has a Style Score of A in Value. The stock currently trades at 10X its forward earnings, well below the industry average of 16X. The current valuation of the stock provides a solid entry point if the company can capitalize on the acquisitions it has made in recent years.

Now, in terms of growth, consensus estimates have the company making a bottom-line jump of 4.44% to $0.94 and sales slipping 0.62% to $45.45 billion for the current quarter. Full fiscal year estimates anticipate AT&T to see an earnings increase of 1.42% to $3.57 and sales growth of 7.02% to $182.75 billion. Its low beta of 0.62 also provides shareholders protection from broader market volatility, but the company still needs to figure out a way to successfully monetize its acquisitions and trim down its debt.

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