For the past few months, whenever I’ve looked at the BT (LSE:BT.A) share price, it’s almost always been falling. Down 26% over the past year, it does look enticing and undervalued for investors to consider. I should know, I’m in the same boat! But in my eyes, a few things need to happen before this trend lower can change.
Getting past ‘cost transformation’
Management teams love to use corporate jargon, and those at BT are no exception. They refer a lot to the higher costs the group’s incurring at the moment due to “cost transformation”. What this means is that as the business focuses on building and upgrading customers to the full-fibre broadband and 5G networks, costs are higher. Yet when this process has finished, costs should fall.
Put another way, the business has a lot of one-off expenses right now. When this finishes, financial results should improve, which should act to lift the share price.
The big question is around timings. The plan is to deliver Ultrafast Full Fibre Broadband to 25m homes and businesses by December 2026. That seems a long way away, but the bulk of the expenses are front loaded. This means that the cost to deliver broadband for the first 5m is much higher than the second 5m, and so on.
So from my rough calculations, by the end of this year I’d expect the costs to moderate to a much more manageable level.
Boosting fibre-enabled product sales
One perk of the strategy of upgrading customers is that it enables more fibre-enabled product sales and other related revenue streams. Due to more connections to the Ultrafast Full Fibre Broadband and higher roaming, BT can make more money from the annual contracts taken out.
Even during the nine months of 2023 that we’ve had results for, total group revenue was up 3% versus the same period last year. This shows me that the falling share price isn’t due to the business having lower demand.
I expect as more and more customers get upgraded, revenue should continue to push higher. This should help to stop the trend lower in the share price. When I combine higher revenue with more reasonable costs, the result should be higher profit.
A catalyst in May
Finally, if the business has a strong final quarter that it can report as part of the full-year results in May, it could provide a spark to stop the fall.
I’ve seen it on many occasions when the release of results helps to change investors’ view and kickstart a rally. For example, this was evident last year with Rolls-Royce. I’m not saying the BT share price could replicate the same performance over the next year as Rolls-Royce. But it does go to show that earnings reports can be a major catalyst for a stock to change direction.
This is true for both the short- and long-term direction for the stock.
Of course, none of the three points could go to plan and this is the main risk, in my view. Yet should we start to see a change in performance, I’ll be waiting and ready to invest.
