Over the last two years, BT Group (LSE: BT.A) has been one of the worst performers in the FTSE 100. The stock has fallen from near 450p to just 210p today, a decline of over 50%. After such a significant share price fall, are BT shares now a bargain? Is now the time to be buying? Let’s take a look at the investment case.
Valuation
At first glance, the share price does appear to offer value right now. The group recently reported adjusted earnings per share of 27.9p for the year ended 31 March, which at the current share price, places the stock on a trailing P/E ratio of just 7.5. In contrast, the FTSE 100 index has a median trailing P/E ratio of 16.9.
BT also offers a very high yield at present. The company recently declared a full-year dividend of 15.4p per share, which equates to a trailing yield of 7.3%. That’s far higher than the FTSE 100’s median trailing yield of 2.7%. These metrics suggest that BT shares are very cheap on a relative basis.
However, when analysing a stock, it’s important to look beyond valuation, as that is only one piece of the puzzle. It’s also important to consider other factors, such as the company’s financial strength, and the stock’s momentum. So let’s dig a little deeper.
Debt pile
One thing that concerns me about BT is the company’s huge debt pile. At 31 March, the group had total long-term debt of around £12bn on its balance sheet. Equity on the balance sheet was around £10.3bn. That gives a debt-to-equity ratio of 1.2, which is not particularly healthy. For example, Warren Buffett prefers to see a ratio of under 0.5.
A company with low debt has the flexibility to navigate the ever-changing business environment. On the other hand, a company with high debt can get into trouble when business conditions are challenging. BT’s operating profit was only six times its interest expense last year which doesn’t leave a huge margin of safety should profits deteriorate.
Furthermore, BT still has a massive pension deficit of £11.3bn on its balance sheet, which shouldn’t be ignored. The group recently agreed a 13-year ‘recovery plan’ with the trustee of the pension scheme, yet it plans to issue more debt to plug the deficit. The high level of debt and its pension deficit add considerable risk to the investment case, in my view.
Earnings downgrades
It’s also worth noting that the shares have a significant lack of positive momentum at present. The stock appears to be stuck in a strong downtrend, and City analysts are still downgrading their 2019/20 earnings estimates for the company. Over the last month, analysts have downgraded their FY2019 earnings estimates by around 4%. That’s not a good sign and means that the stock could potentially continue to trend down. Ideally, you want to see analysts upgrading their estimates, as this can have a positive impact on a company’s share price.
Weighing up these factors, I’m not convinced BT shares are a bargain right now, despite the stock’s low valuation. I think there are better opportunities within the FTSE 100 at present, including a few of the stocks listed in the free report below.
