At first glance, BT (LSE: BT.A) shares look inexpensive. With the stock near 115p, the telecoms company has a forward-looking price-to-earnings (P/E) ratio of just over six for the trading year to March 2025.
And the anticipated dividend yield is around 6.5%.
Volatility
But BT has been here before, as recently as at the end of 2022. Back then, the stock was at a similar level and tempted investors with its valuation indicators.
Should you invest £1,000 in BHP right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BHP made the list?
The price moved as high as 160p this spring, but has now dropped back again.
Part of the problem is that cheapness doesn’t create value on its own.
For anything to have value, it needs to be of sufficient quality to be fit for purpose. And with businesses, I’d argue that growth potential is an essential component of value as well.
But City analysts think normalised earnings look set to plunge by almost 35% in the current trading year. And they will likely remain near the new lower level the year after too.
On closer inspection, BT isn’t as cheap as it seems. That’s because of the debt on the balance sheet.
The problem is apparent when comparing the market capitalisation of around £11.5bn to the enterprise value of about £31.5bn. The difference between the two figures represents the net debt.
BT’s fibre network is an expensive thing to roll out. And that commitment appears to have pushed debts higher. Meanwhile, it’s undesirable for any business to have large borrowings in a higher interest rate environment. That’s because debt can become more expensive to service. And the situation can put the profits of an enterprise under pressure.
Comparing various figures for earnings to enterprise value throws up some larger valuation multiples to consider. So the P/E ratio may be the wrong metric to focus on.
Turnaround and growth potential
Nevertheless, BT could turn itself around in the years ahead. And that’s despite a multi-year record of declining earnings. If it can, the dividend yield looks attractive now as long as the company can sustain it.
One positive is that BT has appointed its new chief executive. Alison Kirby will start in the role at the end of January 2024.
New blood at the top could bring new ideas, enthusiasm and drive for the business. And Kirby’s appointment looks set to coincide with lower inflation levels, which could mean an end to rising interest rates for the time being.
At the end of July, the current chief, Philip Jansen, was optimistic about BT’s prospects, saying the company made a “strong” start to its trading year in a “competitive” market.
However, there’s a long road ahead for the firm to travel. Jansen said the fibre rollout is just 44% complete. Meanwhile, the customer take-up of the service is running at 32%.
But despite those figures, Jansen said: “While there remains much to do it’s clear that our strategy is working and BT Group is set up for success.”
I think BT shares are for the brave. There may be decent upside potential, but there’s plenty of risk here too. Deeper research is essential before buying. And I wouldn’t describe the situation as ‘screaming’ value right now.
