The City’s analysts are pretty bullish on BT Group (LSE: BT-A)(NYSE: BT.US) at the moment. Even though the share price is up 27% since an low in early October, to 456p, a full 11 out of 18 brokers forecasting think we should Buy BT shares, with only two urging us to Sell and five sitting on the Hold fence.
Year-on-year growth
That’s perhaps not surprising, as BT has put in five straight years of earnings growth, and forecasts suggest the same for the year ending March 2015 and the next two years. Despite the price rise, we’re still only looking at a P/E of 15 for the year about to end, dropping as low as 13.5 based on 2017 forecasts — rising dividends are yielding around 3%.
At Vodafone Group (LSE: VOD)(NASDAQ: VOD.US) we have have 13 out of 29 suggesting we Buy, and that’s a smaller proportion than for BT, with five saying Sell. And a full nine of them are sitting on a Neutral stance.
In fundamental valuation terms, Vodafone looks a lot more expensive at today’s 227p price level, with a P/E of 38 for March 2015 dropping only as far as 30 in two years time. There are higher dividend yields on the cards at around 5%, but they’ll be little more than half covered by earnings for the next few years.
Vodafone shares are clearly valued on the potential for 4G profits right now, but at what levels and when they’ll come in is still very much uncertain — although at Q3 time Vodafone already had 13.7 million 4G customers in 18 markets.
Price targets
What about brokers’ price targets? Of the last five recommendations for Vodafone, targets have ranged from 130p to 255p, with an average of 213p. That’s a full 6% below the current price, so some at least feel the shares are overpriced in the short term — and I can’t see the price doing much until rising 4G earnings start to bring that P/E down a bit.
The last five tips for BT shares suggest targets ranging from 355p to 530p, with an average of 452p. That’s 1% below the current price, but again it’s a short term target — and in the most recent update, on 26 Feb, Credit Suisse lifted its target from 440p to 495p.
I suspect a lot see BT’s 260% share price rise over the past five years as having reached a plateau for now, with the gain having forced the dividend yield down from 5.6% in 2010, even though in absolute terms the dividend is still growing.
Which to buy?
For my money, BT is still a long-term buy right now, and I think its relatively low P/E gives it a degree of safety. For Vodafone things are more uncertain, and until we start to see the colour of its 4G profits, that high P/E and uncovered dividend make me want to stay away.
