2016 has been a rather disappointing year thus far for investors in BT (LSE: BT-A). That’s because its share price has fallen by 2.5% and more pain could lie ahead.
A key reason for that is the ambitious strategy BT is currently undertaking. It’s seeking to make a number of major changes to its business within a relatively short space of time, with there being the potential for problems and delays. For example, it has moved into mobile via its own division as well as purchasing the UK’s largest mobile operator, EE. Integrating such a large business is never an easy task, so BT has changed its organisational structure to try to facilitate the change.
While this could lead to greater efficiencies in the long run, it also means additional risks since such moves can cause difficulties regarding existing business units in the short run. And with BT also investing heavily in its pay-TV offering as well as improving its network, it’s ramping up activity in a number of different areas at the same time and this could lead to uncertainty among investors.
Although BT has bright long-term profit growth potential, it also has a large pension liability and significant debt levels. As such, it seems to be prudent to await evidence of progress on its current transition before buying it – especially since it trades on a relatively high price-to-earnings (P/E) ratio of 14.9.
Better alternatives?
Also falling since the turn of the year have been shares in Next (LSE: NXT). The retailer’s valuation has slumped by 9% year-to-date and a possible reason for this is uncertainty surrounding a potential Brexit. While this is a risk to the business (and the wider economy), Next also trades at a relatively high price despite having rather modest growth prospects.
For example, it has a P/E ratio of 14.6 and yet is only expected to increase its bottom line by 5% in each of the next two years. With a number of other UK-focused retailers offering higher growth at a lower price, it would be unsurprising for Next’s share price to continue its recent fall. Certainly, it’s a high quality business with a bright long-term future, but in the near term its shares could come under a degree of pressure. This could make them worth buying further down the line.
High valuation
Meanwhile, high street baker Greggs (LSE: GRG) has delivered a fall of 18% in its share price since the turn of the year. That’s despite the company having announced a strong start to the year as well as ambitious plans for its next phase of growth. This involves the closure of a number of sites and 355 job losses, with Greggs aiming to increase its fast pace of net new store growth.
Even though the company has excellent long-term growth potential due to the increasing popularity of food-to-go, its valuation is still rather generous. Greggs trades on a P/E ratio of 18.4 and with earnings due to fall by 5% this year, its shares could continue to underperform the wider index over the medium term.
