The BT (LSE: BT.A) share price has increased in value by a staggering 57% over the past six months. This performance makes the stock one of the best performing investments in the FTSE 100 over this period. Over the past 12 months, the stock has returned 33%.
But despite these impressive performances, the BT share price remains approximately 68% below its 10-year high of around 500p. It reached this level towards the end of November 2015.
As such, I believe shares in the company can continue to head higher. This is why I would buy the shares for my portfolio today.
Improving investor sentiment
Just because a stock is trading below an all-time high doesn’t necessarily mean it’ll achieve favourable long-term returns.
However, I believe that over the past 12-24 months, BT has completely changed direction. This new mentality should, in my opinion, help support the group’s return to growth in the years ahead.
But to be completely clear, I think it’s quite unlikely the stock will return to that decade-high of 500p.
In November 2015, the market was willing to pay a high price for the business, which seemed to be at the beginning of a multi-year growth spurt. Analysts were encouraged by management’s heavy investments in BT’s pay-tv business and rising profits. Net income hit a high of nearly £2.5bn in 2016.
Unfortunately, that was a peak for the business. Since then, net debt has tripled, net income has fallen around the third, and the company’s dividend has been eliminated.
I think it’s improbable the business will be able to return to where it was five years ago, at least in the near term. Management would need to find more than £10bn to reduce borrowings and increase profits by nearly 50%. This is a huge — but not impossible — challenge.
BT share price outlook
Still, I reckon the company is heading in the right direction overall. During the six months to the end of September, the group reduced its net debt by £720m. Meanwhile, City analysts believe BT’s net income can reach £1.9bn by 2022, up from £1.7bn.
Of course, these are just forecasts at this stage, but I think they show the company’s potential. It’s clear to me BT is heading in the right direction. If the company continues to chip away at its debt and invest in growth initiatives, I think the BT share price can continue to head higher. These are all qualities I like to see in a company before I invest.
Unfortunately, this is far from guaranteed. A sudden increase in interest rates would push the group’s interest costs much higher. This could make it harder for management to pay off borrowings. Also, a sudden increase in costs — either materials costs or wage costs — could impact profit margins, which would hold back BT’s earnings recovery.
After taking all of the above into account, I’d buy BT shares for my portfolio. I think the company has incredible recovery potential over the next few years.
As earnings steadily improve and the company works at cleaning up its balance sheet, I think the BT share price will push higher, even after its recent performance.
