Last year, the BT (LSE: BT) share price was punished after what can only be described as a tidal wave of bad news engulfed the company. At the time, it seemed the business couldn’t do anything right, and investors rushed to exit. Indeed, between the beginning of January and mid-May, the stock lost more than a quarter of its value, excluding dividends.
However, since bottoming out in May, shares in the telecommunications giant have staged a steady recovery. Over the past eight months, the BT share price has risen around 19% excluding dividends, outperforming the FTSE 100 by nearly 30%. Investors who were brave enough to buy at the bottom have been well-rewarded!
Unfortunately, I wasn’t one of those investors lucky enough to buy at the bottom. But if I had, I would now be considering taking some money off the table after the recent rally.
Time to take profits
Last May, investors were selling BT at whatever price the market offered them, no matter how low. This panic selling pushed the BT share price down to a valuation of just 6.5 times forward earnings, the lowest valuation awarded to the business by the market since the financial crisis.
It looked as if investors were preparing for the worst. But the worst never happened, and now BT is making a comeback. Investor confidence has slowly returned over the past eight months, which is reflected in its valuation. The shares are currently trading at a forward P/E of 9.3.
But I think it will be difficult for the stock to move much higher in the near term because there’s still plenty of uncertainty surrounding the group’s outlook. For example, Ofcom is still trying to push the company to invest more, and charge customers less. Meanwhile, BT’s debt pile isn’t getting any smaller, and its pay-TV business is floundering. Even after spending billions on content and sporting rights, subscriptions to the firm’s TV service declined in the year to the end of March 2018.
After taking account of all of these factors, City analysts believe the group’s earnings per share will slide 14% for the financial year ending this March. No growth is expected for the following year, either. As my colleague Edward Sheldon has also pointed out, falling earnings could mean BT’s dividend yield is living on borrowed time.
A lower multiple
Considering these forecasts, I believe shares in BT deserve to trade at a slight discount to the rest of the UK telecommunications sector, which is currently at a median P/E of around 13. I think a multiple of approximately 10 to 12 is suitable for the business as it works to return to growth. That implies a slight upside from current levels, but not much.
With that being the case, if I owned BT today, I’d be looking to sell some of my position. The company has achieved tremendous gains for investors over the past eight months, but I don’t think this performance can be repeated in the near term. What’s more, the FTSE 100 is full of bargains right now, and many of these companies have brighter outlooks than embattled BT.
