For Immediate Release
Chicago, IL – September 10, 2019 – Zacks Equity Research Ally Financial (ALLY - Free Report) as the Bull of the Day, Craft Brew Alliance (BREW - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on AT&T (T - Free Report) and Arconic (ARNC - Free Report) .
Here is a synopsis of all four stocks:
Bull of the Day:
If you watch televised financial news, you’re probably familiar with Ally Financial, a frequent advertiser that markets consumer friendly products and services, primarily online. What many people may not know is that Ally Financial was founded in 1919 as the General Motors Acceptance Corporation (GMAC) in order to provide automobile financing to customers who had never before purchased a single item as expensive as a new automobile.
Over the next 100 years, that company would grow to become a diversified financial institution, accepting savings and checking deposits, making non-automobile related consumer loans, and offering investment and retirement savings services. It’s currently the nation’s 19th biggest bank by assets and the #1 automobile lender by volume.
Though it is an entirely separate entity, the association with GM was seen as a liability after automakers received massive federal government assistance during the financial crisis. In 2010 GMAC was rebranded as Ally Financial.
(GMAC itself also received approximately $17.2 billion in investments from the US Treasury during the crisis. The total value of that investment was over $19B when the Treasury sold the last of its Ally holdings in 2014.)
Banks borrow at the short term rate and then lend to businesses and individuals at (usually higher) long term rates. They keep the difference (as well as collecting other fees) and pay the administrative cost of running the operation. In low interest rate environments like we’re experiencing now, traditional borrow-and-lend institutions tend to suffer from spread compression.
The current environment features an extremely flat yield curve making opportunities to collect juicy interest rate spreads. The long-term average rate on a 30-year conventional home mortgage is 8.02%, but the current rate is just 3.5%. There’s simply not a lot of room right now for lenders to make basic lending profits. The banks are left increasingly dependent on commissions and fees. Real estate and employee compensation costs don’t decline along with interest rates.
Ally is different for a few significant reasons.
First, as the nation’s largest auto lender, it enjoys higher rates on that portion of its outstanding loans than banks that rely more on commercial loans and mortgages. The average spread between a mortgage and an auto loan – for a customer with good credit – is between 100 and 150 basis points. That spread grows as a customer’s credit rating declines.
Also, Ally doesn’t operate any physical branches; they are a “direct bank” that offers all traditional banking services online, over the telephone, by mail and at ATM machines. The cost savings allows Ally to keep customer fees extremely low or in some cases – like at ATMs – free. They’ll even reimburse customers if another bank charges them an ATM fee.
Bear of the Day:
The beverage industry is forced to deal with constantly changing trends and customer tastes. While some consumers have a favorite drink or two that they purchase over and over, a much bigger portion of the market prefers to try new beverages often. New products become popular and sales soar seemingly overnight, leaving the last "hottest drink" suddenly out of favor.
The current alcohol beverage DuJour is “spiked seltzer,” a segment largely defined by the popularity of White Claw, a product for which a brand name is coming to define an entire class of product. With sales that increased more than 300% between May of 2018 and May of 2019 and continue to climb, White Claw was the subject of a well-publicized nationwide shortage heading into this year’s Labor day Holiday weekend.
They simply couldn't make enough to keep up with demand - a nice problem to have.
Once upon a time, Americans solidly preferred beer over wine or spirits, and most of the beer sold was light lager varieties, produced by huge breweries like Budweiser, Miller and Coors. The 1990’s saw a steep rise in the popularity of craft brewed beer, made in smaller batches and featuring a more diverse set of ingredients and flavors.
The first widely successful craft beer was Samuel Adams Boston Lager – produced by the (now huge and public) Boston Beer Company. Once the floodgates were open, hundreds more small competitors followed and the big brewers took notice, acquiring dozens of small brewers and selling their products under the original brands - except they were now brewed in modern facilities and enjoyed efficient nationwide distribution.
The big breweries walk a fine line with craft beer. Many craft beer customers consider themselves iconoclasts, seeking out lesser known and unique beers and sometimes displeased to find that what was apparently a “microbrew” is actually produced by Anheuser Busch InBev or Molson Coors -- even if the arrangement keeps their favorite beer available at every grocery store at a reasonable price.
Beermakers are also facing a customer migration to spirit-based beverages because of consumer preference toward low-carbohydrate drinks, as well as declining sales of alcoholic beverages overall.
With $200M in annual sales, Craft Brew Alliance is among the largest of the “small” brewers and its flagship Kona brand capitalizes on an image of a laid back Hawaiian lifestyle. BREW attracted the attention of Anheuser Busch InBev, which took an 31.4% ownership stake in the small brewer in 2016 as part of a licensing and distribution deal.
BUD also had the right to acquire the rest of BREW for $24.50/share through August 23, 2019, but with BREW shares trading around $14 on the open market, the World’s largest brewer declined to exercise its option – which would have cost around $475M – and chose to instead pay the contractual $20M surrender charge.
The two companies will continue to collaborate under the terms of the 2016 agreement.
BREW shares immediately sunk to below $10/share where they continue to trade today, badly lagging the performance of the beverage industry and the S&P 500.
Elliott Management Discloses Major Stake in AT&T
Shares of AT&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.
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.
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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