Could I double my money if I buy at this BT share price?

Rupert Hargreaves explains why he thinks the current BT share price undervalues the company and its potential over the next few years.

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The BT (LSE: BT.A) share price looks cheap compared to its trading history. At around 200p, the stock is trading about 60% below its 10-year high of 460p printed in December 2015. 

Unfortunately, just because a stock looks cheap compared to its trading history does not necessarily mean it is a good investment. The BT share price might look cheap but over the past seven years the company’s profits have fallen. This suggests the corporation is worth less today than it was in 2015. 

However, I think the stock still has tremendous potential over the next couple of years. And according to my figures, there is even a chance the BT share price could double my money. 

The comeback kid

According to the company’s projections and analysts’ expectations, the group is expected to grow in 2023 for the first time since 2016. 

This will be a landmark for the business, which has been struggling against multiple headwinds over the past couple of years. The most significant headwind has been competition. And this has not gone away. BT is still having to fight for market share against smaller, more nimble competitors. 

However, customers are returning to the company, albeit relatively slowly. That is why analysts expect the group to return to growth in 2023. 

While there is no guarantee the enterprise will be able to return to growth, if it can, I think the market will reevaluate the firm’s potential. This could lead to a re-rating of the BT share price. To put it another way, the market may be willing to pay a higher multiple for the enterprise due to its growth potential. 

Indeed, at the time of writing, the stock is trading at a forward price-to-earnings (P/E) multiple of 9.5. By comparison, FTSE 100 peer Vodafone is selling at a multiple of 16 times forward earnings. If BT can trade up to the same multiple, the stock could be worth as much as 333p. 

These figures imply that the stock is undervalued. And the P/E ratio is not the only metric that leads to this conclusion. Analysing the company’s free cash flow provides more evidence that the BT share price is cheap. 

BT share price valuation

In 2017, the corporation reported a free cash flow per share figure of 31p. With the group set to return to 2017 levels of profitability in the next two years, it may be able to achieve the same figure.

With the company’s peers trading at an average ratio of 15 times cash flow, I believe there is enough evidence to justify the claim that the stock could be worth as much as 465p, an increase of 130% from current levels. These numbers suggest I could double my money if I buy the BT share price at current levels. 

Unfortunately, there is no guarantee it will double my money over the next couple of years. The above projections rely on a couple of assumptions. Firstly, that the market will re-rate the stock to a higher valuation. And that the firm can return to growth. 

Still, I think they illustrate the potential of the investment. That is why I would be happy to buy the stock for my portfolio today at current levels. 

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 assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. 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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