The BT (LSE: BT.A) share price has plunged this year. Indeed, the stock is off nearly 50% since the beginning of 2020.
Following this decline, the shares look cheap compared to their historical pricing. As such, some investors might be attracted to the business based on its valuation and potential to produce significant gains if the stock returns to previous levels.
However, while the BT share price might look cheap at current levels, there’s no guarantee the stock will make investors rich. The company continues to face some significant headwinds, and it’s unlikely these problems will dissipate any time soon.
BT share price problems
The most significant headwind to the company’s growth in the long term may be its high debt levels. BT has some of the highest levels of borrowing of any FTSE 100 company. That’s excluding the organisation’s massive pension deficit which, at over £5bn, is bigger than some FTSE 100 businesses.
These obligations have weighed on the BT share price for some time. The company is having to spend hundreds of millions of pounds every year on interest costs. It’s also having to deposit more money into pension schemes and close the funding gap. This means the funds cannot be invested back into the business to improve growth.
One impact of this is declining profitability. Over the past six years, the group’s profits have decreased. In its last financial year, the company reported a net income of £1.7bn, down from £2.1bn in 2015. If this trend continues, the BT share price may struggle to return to historical levels.
The company has also had to reduce its shareholder dividend. Management has hinted that the group will look to increase the payout in future, but there’s no guarantee of this. If net profit continues to decline, BT may be forced to spend this money on other projects.
Undervalued
Despite all of the above, the BT share price looks cheap at current levels, based on fundamentals. The stock is trading at a forward price-to-earnings (P/E) ratio of just 5.8. That’s compared to its historical average of around nine.
These numbers indicate the shares offer a margin of safety at current levels. Therefore, they could produce attractive returns for investors in the years ahead. However, earnings are falling and pressure is building on the company to invest more in its operations. So there’s no guarantee BT’s valuation will ever return to normal levels.
As such, it seems unlikely the stock will produce significant returns for investors. While the organisation looks undervalued, the BT share price continues to face some significant headwinds, which the company needs to deal with before it can return to growth.
There’s no guarantee the business will ever be able to deal with these problems, and that could mean the stock continues to languish for the foreseeable future.
