Here’s Why BT Group plc Could Surge To 750p

BT Group plc (LON:BT) reported a decent set of results, but more upside may lie ahead, argues Alessandro Pasetti.

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The best way to look at BT (LSE: BT-A) (NYSE: BT.US) these days is to consider it as a long-term investment play. Its quarterly and full-year results, which were released on Thursday, just confirmed that view. Its stock currently trades at 450p, but could rise to 750p if you are patient enough to hold on to it for five years. 

Outlook

BT’s fundamentals show that the business is in good shape. Its pension deficit weighs on its valuation, however.

Results didn’t move the needle, but BT said today that it expects some revenue growth in the next twelve months and “modest growth” for earnings before interest, tax, depreciation and amortization (EBITDA) , which isn’t ideal, but was expected following its pricey takeover of mobile phone operator EE, although the acquired business has not been included in the projections. 

Moreover, 2016 normalized free cash flow — before specific items, pension deficit payments and the cash tax benefit of pension deficit payments — will likely be in line with trailing results at £2.8bn (for an implied yield aof 7%), according to BT’s estimates, while a combination of dividends, which are forecast to rise between 10% and 15% in the next twelve months, and £300m of stock buybacks should contribute to value into next year. 

What comes after that is just as important, though. 

BT At 750p

The stock last traded around 750p in October 2000. For that year, revenues were slightly higher than now at £18.7bn, but free cash flow was lower and rapidly declined into 2001, while basic earnings per share (EPS) stood at 31.7p, which compares with adjusted EPS of 31.5p and reported EPS of 26.5p in 2014, according to BT’s results. 

BT reported a huge loss in 2001 (£1.6bn), when EPS came in at -27.7p, but the stock comfortably traded above 500p even after the damage had become evident. Its dividend per share dropped from 21.9p in 2000 to 8.7p in 2001, which compares with a full-year proposed dividend of 12.4p a share in 2014 — the implied forward yield stands at about 3.1%. 

In September 2001, when it also became apparent that its corporate strategy with regard to the spin-out of its cellphone business wasn’t very easy to digest for analysts, BT managers did all they could to defend their decision, but the tech bubble burst and 9/11 contributed to a 55% drop in its value during the year.

Still, the stock traded around its mean of about 500p for the year well into the summer. It currently trades 50p lower than that level, and BT’s corporate strategy has been praised by investors in recent times. BT still lacks growth, but if it manages to grow EPS at 10% a year, which is a distinct possibility, and assuming its forward p/e multiple remains constant at 16x, the shares will conformably hit 750p by 2021. 

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.

Alessandro Pasetti 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.

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