The worst-performing stock in the FTSE 100 so far today (18 February) is BT Group (LSE:BT.A). At 142.7p, it’s down almost 6%, mostly due to a downgrade from a leading Wall Street bank. With some of the reasonings provided by the research team, it could spell trouble looking forward for the BT share price.
Flipping the view
The research team at Citi downgraded BT Group from a previous Buy recommendation to a Sell. They revised the target price for the coming year down from 200p to 112p. That’s basically halving the expectations, with the view that the stock will fall, not rally, from the current level.
In terms of reasoning, they make a rather big assertion that they feel Openreach will have a decline in revenue for the coming year and remain that way for the rest of the decade. As a result, this could put pressure on free cash flow. Citi also cites concerns around the sustainability of the Consumer division pricing structure in the long term.
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Given that the bank is very reputable in terms of research and content, the stark outlook and slashing of the price target has been the main trigger for the share price fall today. Clearly, the implications that Citi cite aren’t just concerns for today. If true, it could trigger a large move lower in coming months.
The other side of the coin
Some investors might feel that the claims around Openreach won’t turn out to be correct. The division, which manages the UK’s broadband infrastructure, has made significant progress in expanding its full-fibre (FTTP) rollout. As this continues, BT becomes an even more dominant fibre provider in the UK.
FTTP broadband plans generate higher average revenue per user, so as more users migrate to full fibre, Openreach will benefit from premium pricing. In theory this should increase the revenue from this division, not decrease it.
Further, one of the key reasons behind the new rollout is that companies increasingly rely on cloud computing, AI, and data-heavy applications. The fibre expansion with Openreach caters to this. So in the years to come, there’s a good chance of higher corporate subscriptions for BT.
Implications from here
The BT share price is still up 37% over the past year, even with the move today. This highlights that investors are happy with the direction of the company.
Even with this move, the price-to-earnings ratio is 8.17. This is still below the fair value benchmark of 10 that I use when trying to value companies.
Based on the current financials and the valuation of the company, I struggle to see how the stock will fall to 112p as Citi suggests. I don’t have cash free to buy BT right now, but I do feel this represents a dip that other investors might want to consider buying.
