Are BT Group plc And Glencore PLC Poised To Deliver Big Gains?

Do recent developments make BT Group plc (LON:BT.A) and Glencore PLC (LON:GLEN) compelling buys?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As BT Group (LSE: BT-A) prepares to swallow up EE and Glencore (LSE: GLEN) battles to reduce debt, is either stock likely to be a profitable buy this year?

Glencore battles on

It’s been a tough 12 months for investors in Glencore. Almost 70% has been wiped off the value of the firm’s shares.  Yet things could be worse.

Net debt is now on track to fall from about $30bn to $18bn/$19bn by the end of 2016. On 10 December, Glencore said that if prices remained unchanged, it would generate $2bn of annual free cash flow. The group expects to remain cash flow positive even at much lower prices.

Perhaps the biggest win so far is that Glencore’s commodity trading division seems likely to fulfil its promise of remaining profitable regardless of market conditions. Trading commodities is expected to deliver an adjusted operating profit of $2.5bn for 2015. Guidance for 2016 is similar, at $2.4bn to $2.7bn.

If Glencore can maintain these profits, then losses from its mining business should be manageable. The City seems to agree. Current forecasts show that a post-tax profit of $967m is expected for 2015, rising slightly to $1,071bn in 2016.

Glencore shares currently trade on around 15 times forecast earnings, with a 3.3% dividend yield forecast for this year. If the commodity sector is close to the bottom, then Glencore could be a reasonable buy.

The big risk, of course, is that we may not be close to the bottom. We could be at the start of a longer, deeper slump in commodity demand. There’s no way to be sure, which is why it’s probably sensible to limit your exposure to commodity stocks to a small part of your portfolio.

BT buys 25m new customers

BT announced this morning that the Competition and Markets Authority has approved the group’s £12.5bn acquisition of mobile operator EE.

The deal means that BT will acquire 25m mobile customers and take ownership of the UK’s largest mobile network. BT believes it can generate cost savings of £360m per year by the fourth year after completion, although it does expect to spend £600m to make these savings.

In my opinion, owning the UK’s largest broadband network and its largest mobile network should put BT in a strong position to take the lead in the quad play market. This means selling mobile, landline, broadband and television all in one contract. What’s less clear is how well the group’s shares will perform as an investment.

To fund the acquisition, BT will issue 1.6bn new shares to EE owners Deutsche Telekom and Orange, and take on £2.4bn of new debt. This means BT’s share count will rise by about 20%, as will the cost of its dividend.

BT’s own figures suggest that the acquisition of EE will make a positive contribution to the group’s adjusted earnings per share in the second year after the acquisition. I suspect it might be longer until the deal delivers significant returns.

City forecasts suggest that BT’s earnings per share will remain flat over the next couple of years and that dividend growth of 10%-plus will be maintained. This seems ambitious to me.

BT shares currently trade on around 15 times earnings and offer a prospective yield of 3%. I think there’s better value elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »