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Is BT Group plc Set For Electrifying Earnings Growth In 2014?

Today I am looking at the earnings prospects of telecoms giant BT Group (LSE: BT-A) (NYSE: BT.US) in the year ahead.

Dial in for stunning earnings growth

I believe that BT’s bold steps in recent years to become Britain’s foremost triple-services entertainment provider bodes well for strong growth from next year onwards.

In particular, BT continues to enjoy surging uptake for its broadband services, and the firm punched its best quarterly performance during July-September with Openreach installations jumping 70% during the period.

BT secured more than nine-tenths of all new broadband connections during the period, the reward of its multi-year, capex-sapping fibre laying programme which now connects 17m homes and businesses. But BT’s customer base has also benefitted from the lowest level of line losses in five years, a statistic undoubtedly helped by the firm’s decision to offer its BT Sport channels free to all broadband clients.

Indeed, BT has proved extremely shrewd in battling sports broadcasting colossus British Sky Broadcasting Group to boost its own television arm, whose strategy has also encompassed signing synergies with Virgin Media to show its sports channels, and buying up ESPN from Disney and with it the firm’s sizeable portfolio of sports rights.

Since then, BT’s winning bid to exclusively show UEFA Champions League and Europa League from mid-2015 should also reap massive rewards. Although hugely capital intensive — the firm paid almost £900m for the three-year deal — I believe such moves should help to win its TV arm further business next year and beyond.

However, the business faces the prospect of rising operating costs at its internet and telephone division from next year onwards in line with regulatory requirements. OFCOM announced this week that Openreach will have to mend around 67% of faults within two days of notification from next April, rising to 80% from spring 2016. Elsewhere, BT is also under pressure from Labour to cut line rental charges which are due to rise in January, echoing recent attacks on utilities providers.

BT Group has clocked up four consecutive years of earnings growth in recent years, but analysts expect the firm to break this trend with a 4% slide, to 25.6p per share, earmarked for the 12 months concluding March 2014. This slide in earnings is attributed to the huge cost of building its BT Sport package, investment which I am confident should facilitate exceptional long-term growth.

Indeed, the City’s number crunchers expect the firm to bounce back strongly in the following year with a 13% improvement to 28.9p per share. Based on these forecasts, BT currently deals on P/E ratings of 14.6 and 12.9 for this year and next, well below a forward average of 21.2 for the entire fixed line communications sector. In my opinion this represents great value considering the company’s fantastic growth potential.

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> Royston does not own shares in any of the companies mentioned in this article.