Why Wall Street Is Siding With Activist Investor on AT&T

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The recent news that Elliott Management had taken a large stake in AT&T Inc. (NYSE: T) sent shares higher on Monday, although a 5% gain to $38.14 shrank to just a 1.5% gain by the day’s end.

While 24/7 Wall St. has covered the reaction and what Elliott is really calling AT&T out on, there seems to be growing support on Wall Street that there is some merit to what Paul Singer and his team of activists might want here. There are also some views that AT&T already may be making efforts in this direction.

An underlying “undervalued” theme runs throughout most of the reports we have seen. There seems to be no real consensus about how AT&T could actually get up to $60 per share over the next two or three years, nor what happens if that “recession call” in the media actually comes to fruition? Will AT&T be as well-loved then? Will buyers for the assets that could be purged be able and willing to pay top dollar if the business climate is soft?

The following are some of the analyst calls we have seen in the post-activist trading period.

Merrill Lynch maintained its Buy rating and $37 price objective, but even with newer management coming on board, the full leadership position was called “not fully clear” in the firm’s view.

Nomura/Instinet reiterated its Buy rating and its $43 target price. The firm noted that the activist’s suggested path to a $60 valuation actually has some of the ideas already being undertaken and some ideas can be accelerated. While some of the ideas are unlikely, the firm agrees that AT&T is undervalued.

Independent research firm Argus reiterated its Buy rating and has a $48 price target. Argus noted that AT&T could review some noncore assets, but assets like DirecTV are currently critical despite being a drag on the company’s current results. Also, controlling video content and having spectrum assets will be crucial for wireless video distribution as 5G escalates.

CFRA reiterated its Buy rating and raised its target price to $40 from $36. This research firm sees Elliott’s stake as a positive, with AT&T already moving to sell noncore assets and to cut its debt levels. The firm believes that the activist is correct about the need to be more aggressive.

Citigroup reiterated its Buy rating and raised its target price to $42 from $37, while Barclays maintained its Equal Weight rating and raised its target to $35 from $31.

Morningstar had removed AT&T from its Best Ideas list earlier this month as the share price approached its $37 fair value estimate, but the firm noted that it echoes the Elliott criticisms about capital allocation and that its shares have been undervalued recently. Still, Morningstar said that it has a “Poor” stewardship rating.

Wells Fargo reacted to the news on Monday morning by saying AT&T is already making some of the calls come to pass (short of management changes). Wells Fargo also was surprised that the letter did not call on AT&T to fix its broadband issue as the fiber broadband penetration is really in less than 25% of its footprint.

AT&T also has reportedly retained Goldman Sachs to defend against the activist investor pressure.

Shares of AT&T were up about 1.7% at $37.40 on Tuesday’s day-two reaction. AT&T has a 52-week trading range of $26.80 to $38.14. Its dividend yield is 5.45% for new buyers coming in now, but this had been over 6% until the shares started rallying at the end of August.


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