The BT share price surges on earnings but I’m still not buying

The BT share price is on the rise after releasing a record-breaking earnings report. But Zaven Boyrazian has spotted a growing problem.

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After months of decline, the BT Group (LSE:BT.A) share price surged by just over 10% last week, on the back of its half-year earnings report.

The stock is still firmly below its June high. But this latest momentum has helped increase the 12-month return to an impressive 58%. So what was in this report that has investors excited? And should I be considering this business for my portfolio?

The BT share price makes a comeback

It’s been a transformative six months for the telecommunications giant. After years of growing complacent, management has decided to up its game with a £15bn reinvestment programme. And looking at these latest results, the early data’s quite encouraging.

The firm has successfully rolled out fibre broadband to six million homes, bringing it closer to its 2026 target of 25 million homes. At the same time, BT has expanded its 5G mobile network to cover 40% of the UK, serving over 5.2 million customers. That’s up from 3.2 million just a few months ago.

Furthermore, its cost-saving programme is starting to bear fruit. The firm has achieved £1bn in annualised savings 18 months ahead of the original timeline. And it also announced that an additional £2bn of cost savings tabled for 2025 will be completed by 2024.

Combining this progress with additional product launches, including a new cybersecurity enterprise solution, the firm looks like it’s getting back into prime form, in my eyes.

And management appears to agree, since dividends have been reinstated after being cancelled in early 2020. Needless to say, this is fantastic news. So seeing the BT share price jump by double digits is hardly surprising.

Taking a step back

As exciting as the group’s recent performance is, there remains a long road ahead. Despite rising customer numbers and new contracts being signed, revenue for the last six months still came in basically flat. Pre-tax profits were also a similar story, and net debt’s still rising.

This isn’t unexpected since the business is heavily re-investing in itself at the moment. And the full effects of management’s cost-savings efforts aren’t likely to materialise until the next couple of years.

Assuming the firm’s expense-reduction targets are met, the increased operating profit margins will undoubtedly be a positive influence. However, they may not translate into higher net earnings, due to BT’s growing pile of loan obligations.

With interest rates expected to rise in the short term, the company’s bottom line may struggle to grow. And that’s obviously bad news for the BT share price.

The bottom line

After recent updates, my opinion on BT has once again improved. But while future revenue growth and margins are set to rise, the state of the balance sheet continues to concern me.

I suppose the company can use its future growth to reduce its leverage. In that case, I may become tempted to add this stock to my portfolio. However, until then, it’s staying on my watchlist.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Zaven Boyrazian 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.

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