The BT (LSE: BT.A) share price has been on a bumpy ride this year. After dropping to a low of around 120p at the beginning of February, the stock rallied above 200p in mid-July. The shares then plunged in value, falling to a low of 135p.
Since then, the BT share price has been pushing higher. It is currently trading around 173p after recovering from most of the losses in the third quarter.
Overall, over the past 12 months, shares in the telecommunications giant have jumped around 25%. However, I think there are three reasons why the stock can continue rising over the next few weeks and into 2022.
BT share price: takeover potential
The first reason I think the stock can continue rising is the bubbling takeover talk surrounding the business. Ever since French telecoms billionaire Patrick Drahi bought a 12% stake in BT over the summer, speculation has been swirling in the city that he will make a full offer for the company.
In reality, I think it is unlikely such an offer will emerge. BT is a sprawling giant with a multi-billion pound pension deficit. Untangling the enterprise and managing these pension assets would be a hugely complicated process. These challenges are likely to put off buyers.
What’s more, it is highly likely the government will interfere in any deal due to the national importance of the company and its influence over the UK’s communications network.
Having said that, speculation of a potential acquisition could be enough to continue to push the stock higher. Drahi’s interest supports the idea that BT looks cheap. Considering his success as an investor, other market participants may want to ride his coattails and buy the stock.
As well as takeover speculation, investors may continue to buy BT as the corporation pushes ahead with its restructuring plans. This year, the group has undergone somewhat of a significant transformation. It is spending more money on its core telecoms business, focusing mainly on improving fibre connectivity around the country.
At the same time, management has been trying to restructure non-core divisions, including the group’s pay-TV business.
This has been a drain on the company for several years. BT’s pay-TV arm, which includes BT Sport, initially set out to capture a large share of this market by offering consumers an all-in-one package. Customers can bundle pay-TV, broadband and phone packages together in a straightforward package.
Unfortunately, the division never lived up to management’s lofty expectations. Moreover, BT Sport became entangled in an arms race with Sky over sporting rights. The price these competitors were willing to pay to gain exclusive streaming rights for sporting events skyrocketed, and their returns plunged as a result.
BT is now trying to untangle this business. It has agreed on a £600m deal with streaming company DAZN to co-operate on a streaming sports business. There is also speculation that Discovery, the US media group which owns Eurosport, is in talks with BT about a joint venture for its sports businesses.
This initiative will allow the company to spend more time focusing on its core business model. It could also reduce losses and improve the offer for customers.
Overall, I think the reorganisation of this business model will help improve the organisation’s sales and profitability. This is likely to lead to a higher share price when the benefits start to show through on the company’s bottom line.
The undervalued BT share price
The third and final reason why I believe the BT share price can continue to climb is the fact that the stock currently looks undervalued.
Before the pandemic and the launch of the company’s new growth initiatives, the group was struggling. Net profit slumped from £2.5bn in 2016 to £2.2bn for 2019. Income has fallen further since, with the company reporting a net profit of £1.5bn for its 2021 financial year.
This is expected to be the low point for the enterprise. Thanks to the company’s focus on customer service and network expansion, sales and profits are recovering, albeit at a relatively slow pace.
According to the City, net income will hit £1.8bn for the company’s current financial year, rising to £2bn in fiscal 2023.
Based on these projections, the stock is currently trading at a 2023 price-to-earnings (P/E) multiple of 8.5. This suggests the corporation is deeply undervalued at current levels. Historically, the BT share price has commanded a P/E of around 11, indicating the stock could have significant upside as the group continues to push ahead with its restructuring and growth plans.
I think a profit recovery will be the catalyst that causes the market to take another look at the business. The company’s dividend is also returning this year. For the current financial year, analysts have pencilled in a dividend per share of 7.5p, giving a yield of 4.4% on the current stock price.
This level of income is incredibly attractive for income investors in the current interest rate environment.
Bumpy road ahead
However, I do not believe it will be plain sailing for the group from here on out.
The company faces a range of challenges. These include fighting off competition to meeting regulators’ demands for increased broadband connectivity across the UK.
The group also has a lot of debt on its balance sheet. The cost of this debt could increase substantially if interest rates rise, which would impact overall profitability and hold back growth. And finally, the company has a multi-billion pound pension deficit. Management will have to find the cash to fill this gap.
Still, despite these risks and challenges, I would be happy to buy to stock for my portfolio today, considering its growth potential and current valuation.
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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.