The BT (LSE: BT-A) share price has rallied from a multi-year low of 160p to over 200p in less than two months. Even after this big gain, could buyers of the shares look forward to doubling their money? I believe there are a number of reasons to be optimistic, and I think the risk-reward opportunity of the stock remains compelling.
Discount
Following the FTSE 100 firm’s cash-and-shares acquisition of EE in early 2016, the market valued the enlarged group at close to £50bn (around 500p a share). With the shares at 205p, as I’m writing, it’s now valued at little more than £20bn.
Despite the recent rally, BT wouldn’t even have to fully re-rate back to its previous valuation to double investors’ money. The sheer size of the discount is one reason why I’m optimistic about the potential of the stock to deliver a high investment return.
Competitive advantages
Of course, the share price wouldn’t be where it is today if investor sentiment had remained as strong as in early 2016. The business performance of the group has certainly been lacklustre (or perhaps poor would be nearer the mark), and has failed to live up to the market’s expectation of its prospects three or four years ago.
However, I remain convinced BT has strongly attractive business fundamentals it hasn’t yet really exploited. For example, it’s in the unique position, following the acquisition of EE, of being the only UK telecoms group with both fixed-line and wireless networks. This means it largely controls the upgrade schedule — whether fibre-to-the-home, G.fast, or 5G — which should give it competitive advantages.
If BT hasn’t been able to exploit its strengths so far, why do I think it’ll be able to do so in future?
Management
One reason for my optimism is the current management. Chairman Jan du Plessis took up the role in November 2017. He was previously chairman of mining giant Rio Tinto, helping guide the business through a difficult period, which included the replacement of its chief executive.
Likewise at BT, he’s overseen the departure of the incumbent chief executive and appointment of new man Philip Jansen. The latter built his reputation as a shrewd allocator of capital for growth at Worldpay, which is exactly what I think BT needs.
In June, Jansen bought £3m of the company’s shares at 202p, and upped his holding in September with a further £1m at 171p. If he’s allocated his personal capital as effectively as he allocated corporate capital at Worldpay (and hopefully will do at BT), investors won’t be complaining. I think his share-buying is another reason for optimism.
Big upside potential
BT is trading at just 8.5 times forecast earnings for its current financial year, ending 31 March 2020. City analysts expect this to be the trough year, with earnings growth turning up in fiscal 2021. The lowly earnings multiple offers big upside potential, if Jansen’s capital allocation plans deliver the anticipated growth.
For the moment, the company is maintaining its dividend at 15.4p (7.5% yield), but has cautioned investment will take precedence, if push comes to shove. I think it’s the right strategy.
In summary, I see BT as a promising double-your-money candidate for investment, due to its competitive advantages, promising new management and lowly valuation. For these reasons, I rate the stock a ‘buy’.
