AT&T (T) stock rose 9% in pre-market trading after Elliott Management disclosed stake in the company worth $3.2 billion today. The activist investor sent a letter to AT&T’s board claiming that the telecom titan can “improve its business and realize a historic increase in value.”
Why Elliott picked AT&T stock
Elliott Management is known for picking up undervalued stocks. The company said that AT&T stock could be worth $60.0—more than 65% higher than the close of $36.2 on September 6. Currently, the stock is trading at its 52-week high. So far, the stock has risen more than 25% this year. Even if the stock has rallied this year, AT&T has significantly underperformed broader markets in the long term.
The letter to AT&T’s board of directors also said, “Elliott believes that through readily achievable initiatives — increased strategic focus, improved operational efficiency, a formal capital allocation framework, and enhanced leadership and oversight — AT&T can achieve $60+ per share of value by the end of 2021.” The letter summarized a four-part plan that Elliott calls “the Activating AT&T Plan.” Notably, the plan would create value.
AT&T’s debt and free cash flow
Elliott Management expressed concerns with AT&T’s huge debt and suggested repaying it aggressively. At the end of the second quarter, AT&T had $162.0 billion in net debt. Elliott Management suggested selling some of the non-core assets signaling at its Time Warner acquisition in 2016. According to Elliott Management, AT&T hasn’t said why it needs to own Time Warner. AT&T has been trying to expand beyond its saturated telecommunications business for the last few years.
AT&T has been on a very strong footing considering its free cash flows. The company generated $14.0 billion in free cash flows in the first half of the year. AT&T expects to generate $28.0 billion in free cash flow this year. The free cash flow can be used to repay debt and for dividend payments.
As of September 6, AT&T stock was trading 10x its forward earnings. The measure indicates a deep discount compared to its historical average. The company’s five-year historical PE ratio is around 17x. AT&T looks to be trading at a discount compared to the S&P 500 (SPY), which is valued at around 19x. Elliott Management said that AT&T stock is deeply undervalued.
Activist investors buy a small stake in a company and force the management to make operational changes in order to unlock value. Elliott Management bought a stake in NRG Energy (NRG) in 2017. The stock more than doubled in the next two years.
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