BT Group (LSE: BT-A) has picked up a fraction in the past few days. But that can’t hide the bad news. The BT share price has crashed almost 20% in a little under three months. And it’s been on the back of no bad news that I can see. A first-quarter update at the end of July was perhaps a bit mixed, but I thought it was pretty decent all round.
The Q1 update did nothing stop stop the rot, mind. In fact, it resulted in one of BT’s biggest one-day share price falls of the year. But before we panic and react is if the sky is falling for BT, let’s look at the bigger picture.
Though the BT share price has been collapsing since its summer peak, it had actually been soaring in 2021 prior to that. Over the past 12 months, BT shares are, in fact, up more than 60%. So are we simply looking at a much-needed correction? I think so.
At its peak in June, I think BT stock was definitely getting overheated for a company shouldering such a massive debt burden. And that’s been a relatively common occurrence over BT’s life as a public listed company. I do think investors from time to time have become too focused on the technical attractiveness of BT, and forget valuation.
Technology rollout
After all, it’s a leading driver in the high-tech communications business. Its network expansion is going well, including plans for 5G rollout. That is not translating into profits very well right now, though. Earnings per share have declined 35% from March 2017 to March 2021. But I do expect that to reverse in the coming years. And I see a decent likelihood of sustainable earnings growth to come. I can’t guess when, mind, as BT will need to shell out a fair bit more in capital expenditure before it becomes a reality.
Still, even after the recent decline, the current BT share price still gives us a trailing price-to-earnings multiple of only nine. But then we get back to that debt. I’ve previously estimated that once we take into account BT’s £18bn net debt and £8bn pension fund deficit, we’re looking at an effective enterprise value P/E of close to 23. That’s less obviously a screaming bargain.
BT share price valuation
So, working out a valuation for BT is perhaps not easy. But there’s one thing I struggle to get my head round. Why do investors keep piling into BT stock as if it’s the hottest thing on the planet, and then suddenly dump it like it’s a piece of dirt. I see that a lot with small-cap growth stocks. But a £16bn FTSE 100 company just should not be this volatile, should it?
I mean, the valuation, the debt, the ongoing capex requirements — we’ve understood those well enough for a long time. So I see nothing at all that’s changing which could explain the wild gyrations in the BT share price.
Anyway, if I can’t work out why it’s happening, my next question is what should I do about it? I think we could well have a few good years for BT shareholders ahead of us. But while I’m flummoxed by what’s been going on in 2021, I’ll stick to waiting and watching.
