It seemed like the BT Group (LSE: BT.A) share price was never going to stop falling.
But FY results released on 16 May changed that. And BT shares have spiked up 30% since the start of the month.
Key milestones
BT said it passed the point of peak capital expenditure on its fibre broadband rollout. It also reached £3bn cost savings a year ahead of plan.
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CEO Allison Kirkby said the firm is on “a path to more than double our normalised free cash flow over the next five years“. Oh, and the dividend has been lifted again.
I think this boosts the outlook for those of us who feared BT’s rising debt, while it was spending increasing amounts of cash on building out its network.
What the City says
I must be cautious here. I’d never buy or sell a stock just because of an analyst consensus. And I’d never make a decision based on price targets.
Forecasts should always be treated with care. Those offering their thoughts on BT’s future have little more information to go on than we do.
But, I do stand by the Foolish principle of listening to all opinions on a stock, and using them to make up my own mind. And there really is a strong buy consensus out there now.
Bullish moves
Investors’ Chronicle says 90% of forecasters rate BT shares as a buy. That’s up on a year ago, when more were on the fence and had BT as a hold.
As for the price outlook, there’s a median target of 190p. That could mean a 48% hike for the BT share price, on top of the gains we’ve seen so far.
The range is very wide, though. Some bulls expect a fair bit more than that. But the lowest prediction suggests a 14% fall.
If we could watch the process of brokers setting their price targets, I imagine we might see the air full of fingers.
What it means
Forecasts put BT’s price-to-earnings (P/E) ratio at 9.3. If the share price should reach that target of 190p, it could push the P/E up to nearly 14.
That’s close to the FTSE 100 long-term average. And for a stock with long-term growth potential, I think it might be cheap.
But one thing hasn’t been in the headlines, and that’s BT’s debt. Net debt at 31 March stood at £19.5bn, or about 50% more than BT’s entire market cap. I find that scary.
High valuation
In fact, if I adjust to account for the debt, I get an equivalent P/E of about 35. And I’ve ignored the £4.8bn pension fund deficit.
Looking at another measure, the past year’s results show a return on equity (ROE) of 6.8. That’s only about half the average for the telecoms industry.
On some valuations, then, I think BT looks overpriced now.
But, a forecast dividend yield of 6.3% could make it a stock to just buy and forget. Never mind the valuation, feel the cash?
