The telecoms company BT (LSE: BT-A) has attracted attention from a variety of investors in recent years. It is only a year and a half since the company traded as a penny share. But since then, the BT share price has seen a strong recovery. Can it now hit £2 – and beyond?
What is driving the BT share price?
One of the reasons sentiment shifted on BT was the purchase of an 18% stake in the firm by telecom mogul Patrick Drahi’s company Altice. If industry veteran Drahi saw potential value in BT, many thought, he must have had good reasons.
There has also been a move among investors back towards defensive stocks, which for a while had fallen out of favour as growth stories hogged the limelight.
But another key driver for the improving BT share price has been its business outlook. Its third-quarter results, released last month, give a flavour of this. At first sight, small falls in revenues and pre-tax profits for the first nine months of the year may not seem too appealing. But they help show that the business is not in the sort of decline some doomsayers have long feared. Rather, I think the results underline the ability of BT’s infrastructure and customer relationships to keep generating substantial profits. That has been good news for the share price.
Is there more road ahead?
I reckon some of the positive factors above could help push the BT share price higher.
Increased interest in defensive shares combined with a renewed appreciation of BT’s cash generation potential could both continue, in my view. That may lead to investors bidding the share price up. It is only 5% away from the £2 level at the moment. So, if it breaks that barrier, I do not think it will necessarily stop there. I reckon it could go higher.
The company has guided that adjusted earnings before interest, tax, depreciation, and amortisation next year will be north of £7.9bn. That is a sizeable improvement on the £7.5bn-£7.7bn expected this year. Improved earnings could help sustain a higher share price, especially if it looks like the future trend is also positive.
My next move
But although I think the BT share price could head beyond £2, that does not mean that it will.
With the shares up 25% over the past year, higher expectations for the business already seem to be priced in. On top of that, I continue to see risks for the business. The company’s legacy pension costs continue to be a potentially large future liability. That could cut substantially into profits.
An increased focus on living costs could also lead both regulators and customers to pay closer attention to telecoms bills. If that increases price competition, that too could eat into BT profits. Although I see drivers to push BT past £2 a share, I do not find the investment case compelling enough to add the company to my portfolio.
