BT Group (LSE: BT-A) is on the comeback trail. After slipping below 200p for the first time since 2012 earlier this year, the stock has since bounced back to just under 250p, at the time of writing.
This gain means the stock has now closed its performance gap with the FTSE 100 for the year. Indeed back in June, BT was underperforming the UK’s stock index by nearly 30%. Today, that gap has closed to around 3%.
Heating up
I think BT’s performance over the past three months is surprising because there’s been limited news flow over this period. Analysts are still expecting a 12% decline in earnings per share (EPS) for fiscal 2019. Meanwhile, the firm hasn’t yet (at the time of writing) reached an agreement with a new manager to take over from out-going CEO Gavin Patterson (recent speculation suggests the company is chasing Philip Jansen, the joint boss of payments technology operator Worldpay to be its next leader).
However, while news from the company has been limited, it seems bargain hunters have been snapping at BT’s heels. A near-50% decline in the value of any blue-chip shares in the space of three years is bound to attract some attention from value investors around the world — especially when that stock supports a dividend yield of nearly 7%.
Calls for a break-up
One of the most high-profile value investors to take a stake in the business is hedge fund manager David Einhorn.
Einhorn runs hedge fund Greenlight Capital, which recently built a “medium-sized position” in BT. He then ignited speculation that he would be pushing for a break-up of the company, telling investors: “It is possible that new management will unlock value by splitting Openreach from the telecom service provider.“
This is a route we’ve been down before. There’s always been some speculation that the company will break itself up into more manageable chunks but, so far, the enterprise has been reluctant to go down this route again. It had the chance recently when regulator Ofcom asked the group to legally separate the BT and Openreach divisions, which it did by installing an independent board, new management, and removing BT from Openreach’s branding.
The incoming management could go further and fully separate the businesses, although Ofcom stopped short of demanding this action in 2017 because the two firms are joined at the hip by BT’s giant pension scheme. As a result, a full divorce could be very costly, and possibly lead to service disruptions for customers.
With this being the case, I’m not going to bet on a BT break-up anytime soon.
Valuation compelling
Another reason attracting investors to the BT offering is the company’s valuation. The shares currently trade at a forward P/E of 9.5 and yield 6.2%, which looks cheap.
However, considering the company’s lack of growth (and strategy), I’m not a buyer at this level. I’d rather wait and see the incoming CEO’s plans for the business before jumping on the recovery bandwagon.
