The FTSE 100 telecoms giant BT (LSE: BT-A) has had a rough month, sinking almost 10% over the past 30 days. However, it has still delivered 20% year-to-date returns and risen over 50% in the past year. So, why is the BT share price falling? As far I can see it comes down to some key information released in the company’s Q1 earnings report.
The BT Q1 report seemed to be a mixed bag. Revenues were down 3% to just over £5bn, along with pre-tax profit down 4%. However, EBITDA was up 3% for the same period and negative free cash flow was reduced. While these results seem pretty stagnant, I wouldn’t have expected them to have led to such a large movement in the BT share price.
I think the problem for investors lies in the expansive outlook for the firm, and how this will affect them moving forward. Capex increased 63% to $1.5bn and will mainly be used for 5G infrastructure to achieve BT’s network plan of reaching 90% of the UK landmass by 2025. While this is good long-term news for the firm, it means in the short term that money won’t be given back to investors. BT has had a historically handsome dividend, outperforming the FTSE 100 average. If investors have turned sour because of this, I think the BT share price could slide further in the coming months.
BT share price valuation
The BT share price is currently trading with of a monstrous 137x price-to-book (P/B) ratio. For a company that is struggling to make revenues, this seems steep to me. For context, competitor Vodafone trades with a P/B ratio of 60x. However, BT boasts a slightly more realistic trailing price-to-earnings (P/E) ratio of 15x. With £18bn debt on the balance sheet, both P/E and P/B ratios may appear distorted. In fact, my fellow Fool Alan Oscroft estimates a P/E ratio of 23x is more realistic.
Regardless of the hefty valuation, I like the outlook for BT. The firm recently announced that Adam Crozier would be joining the firm as an independent non-executive director and chairman. Crozier has previous experience steering corporations out of trouble. For example, in his seven years at ITV the share price quadrupled. Crozier has announced his interest in restructuring BT to fit into the new digital age. I think that this level of experience could really help the firm effectively roll out its expansive 5G network. If done right, this should pay off for the BT share price in the future.
Overall, I like the future outlook of the BT share price. I think the company has a good plan and the right people behind it to pull it off. However, at current levels, I don’t think the company fundamentals justify its share price. Therefore I will be keeping this stock on my watchlist.
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Dylan Hood has no position in any shares mentioned above. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.