BT (LSE:BT.A) shares have been up and down this year, but primarily up. The stock has gained 7% over the past six months and is up 4.5% over the past year.
However, I’ve been grappling with BT’s valuation and what’s next for the share price.
There are a number of reasons to be optimistic. BT has partnered with Warner Bros Discovery to create a pay-TV powerhouse and the telecoms giant is well positioned to benefit from Britain’s digitisation having spent heavily on internet infrastructure.
However, I’m concerned about the firm’s mounting debt and negative economic forecasts surely can’t be good for pay-TV.
Reasons to back BT
BT is in prime position to take control of the pay-TV sporting market in the UK. In partnership with Warner Bros Discovery, the new mega-network with offer events such as the UEFA Champions League, the English Premier League, Premiership Rugby, the Olympic Games, tennis grand slams, as well as the Tour de France and Giro d’Italia.
The joint venture brings together the sporting content offering of both BT Sport and Eurosport UK — the latter a subsidiary of Warner Bros Discovery. The new network will be owned 50:50.
BT has also made some huge investments in digital infrastructure in recent years. In 2021, the company said it will take fast broadband fibre to 25 million homes and businesses by the end of 2026. BT had planned to reach 20 million customers, but raised its target following changes in tax and regulation.
Debt and inflation: cause for concern
But BT also has a huge debt burden, totalling £21.94bn, more than its market-cap. Its latest trading update highlighted that debt, excluding lease liabilities, was £12.2bn, £0.6bn higher than in FY 2021.
Interest paid on this debt during the last full year to March 31 was £755m. This figure was down from £770m in 2021, but repayments may rise when refinancing takes place. Such a debt burden is going to hurt cash flow and profitability.
The big issue for BT is that its mission to upgrade the UK’s WiFi network through its Openreach division didn’t factor in Brexit, the Covid-19 pandemic and the current soaring inflation.
Inflation can hurt the business in two ways. Inflating raw material and labour costs are not helpful for BT’s massive infrastructure projects.
But inflation is also hurting British households and contributing to the cost of living crisis. This has been compounded by negative economic forecasts. With this in mind, you’d expect under-pressure households to cut pay-TV subscriptions. The same logic can be applied to mobile phone contracts.
Would I buy BT shares?
Will I buy BT shares? I think the debt and impact of inflation is going to pull this share price down. So I won’t be adding it to my portfolio any time soon. Despite this, I appreciate BT has a market-leading offer in connectivity and sports broadcasting.
