AT&T's Stock Boosted After Activist Investor Elliott Management Discloses $3.2B Stake

Shares of AT&T Inc. T gained 9% Monday morning after activist investor Elliott Management confirmed a $3.2 billion stake and detailed how AT&T can generate a potential 65% return.

'The Truth'

Elliott Management said in a letter its large investment reflects a "deep conviction in the extraordinary value opportunity realizable at AT&T today." However, changes need to be implemented first to erase a recent reputation of strategic setbacks and operational underperformance.

"The truth remains that AT&T has irreplaceable assets, enormous earnings power and an ability to win in key markets," the letter said. "Particularly when coupled with a depressed valuation that assumes no changes will be made, we believe AT&T presents as a uniquely attractive business and investment opportunity."

The Assets

AT&T's business should be able to generate "significant value" moving forward as the world demands more connectivity, data usage and content consumption. The wireless business is well equipped to take advantage of these catalysts as it should be a market leader in the next-generation 5G.

Elliott said the company's entertainment business continues to move in the right direction as recent results shows a shift towards higher-value subscribers. Similarly, recent results in the wireline business showed the strongest growth rate in more than three years.

Despite a portfolio of strong assets, AT&T's stock remains historically cheap with a multiple discount relative to its own history. Shares are trading at just 9.9 times P/E which is a 20% discount to its historical average of 12.4 times.

The 'Activating' Plan

AT&T should consider divesting non-core assets, reduce operational inefficiency, consider new capital discipline strategies, and aggressively de-leverage the balance sheet, the letter said. Simultaneously, the company needs to improve its leadership and oversight to improve its business plan and generate "historic value creation" for shareholders.

The company in its current form is simply "inefficiently run," especially compared to its peers. Initiating multiple changes should help lift AT&T's stock to the $60 level or beyond by the end of 2021.

"This level of potential value creation is unique for any company, let alone one with a market capitalization north of $250 billion," the letter read.

AT&T's stock traded higher by 8.2% to $39.23 per share at time of publication.

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