Five years ago, the BT (LSE: BT.A) share price was worth 361p. Today, it is worth less than half of that.
In the stock market, past performance should never be used as a guide to future potential. Just because the stock has under or outperformed the market in the past does not necessarily mean it will continue to do so.
So with that in mind, I have been trying to determine how much the BT share price could be worth five years from now and whether I should buy the shares based on this forecast.
Over the past few quarters, my opinion of BT has changed significantly. I have been encouraged by the company’s capital spending plans and growth initiatives, even though I am aware it could be a while before these initiatives start to show on the firm’s bottom line.
However, last week the organisation published an update I did not expect. The group’s Openreach full-fibre broadband offering is now reaching 6m homes. Connection costs are averaging £250 to £350 per property, which is below initial expectations.
As a result, management believes the corporation has the financial capacity to pursue the rest of the rollout to an additional 5m homes without taking on a partner.
On top of this development, the company has also hit its £1bn cost savings target 18 months early.
Overall, BT’s growth plans are evolving quicker, and costs are falling faster, than projections.
After considering all of the above, I am pretty excited about the outlook for BT. The company has also restored its dividend after cutting it to save money to fund the broadband rollout. After 18 months, the group is going to pay an interim dividend of 2.3p to shareholders.
BT share price outlook
If BT can continue to meet or outperform expectations, I think the outlook for the stock is bright.
The City believes the company will earn 20.6p per share in its 2023 financial year (two years from now). If it does, the stock is currently trading at a forward price-to-earnings (P/E) multiple of just 6.9. Of course, there is a lot that could go wrong over the next two years. There is no guarantee whatsoever the organisation will hit these projections. Challenges the corporation will have to overcome include rising costs, regulatory headwinds, and competition from businesses like Virgin Media.
Nevertheless, I think the numbers highlight the group’s potential.
Five years ago, when the market valued BT more highly than it does today, the shares were changing hands at a P/E of around 10.
Based on this, if BT does hit the City’s growth expectations for the next two years, the stock could return to this valuation. If it does, the stock could increase in value by more than 40% from current levels, excluding dividends.
Based on these metrics, I would buy the stock for my portfolio today, considering its valuation, growth potential, and the group’s restructuring progress.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.