BT (LSE:BT.A) shares fell 5% in early trading on Thursday. The fall came as the British government said it would probe Altice UK’s increased shareholding in the telecommunications group. Last December, French billionaire Patrick Drahi’s company increased its holding in BT from 12.1% to 18%.
However, despite today’s volatility, on the surface, BT shares look like a good buy for my portfolio. It’s trading in bargain territory with a price-to-earnings (P/E) ratio of around 9. It also has a price-to-sales (P/S) ratio of just 0.9, meaning that BT created more revenue in its last reporting year than the total value of its stock.
So, is BT stock set to soar despite the initial reaction to today’s news?
Prospects
BT said in early May that it was moving its sports TV division into a 50-50 joint venture with Warner Bros Discovery. The firm hopes to create a pay-TV powerhouse for sporting events.
The new entity will offer events such as the UEFA Champions League, the English Premier League, Premiership Rugby, the Olympic Games, tennis grand slams, as well as the Tour de France and Giro d’Italia. The announcement came as BT also reported a small rise (2%) in adjusted annual core earnings.
It’s also making EE its main customer-facing brand for its mobile services. EE won the uSwitch award for ‘fastest mobile network’ for the third year running in 2022 and generally is popular among customers. This rebrand could prove a masterstroke for business.
The company has also been spending heavily on infrastructure that should position it to benefit in an increasingly digitised Britain. Capital expenditure reached £5.3bn in the year to March 31, up 25% year-on-year. Capex growth was primarily due to continued higher spend on its fibre infrastructure and mobile networks.
Concerns
Debt is starting to look pretty worrying, however. The groups high spend on infrastructure, among others projects, has seen the company take on £18bn in debt. That’s around 2.5 times higher than BT’s adjusted cash profits and nearly seven times higher than pre-tax profits.
Another concern is falling sales. In its latest report, BT’s revenue fell 2% to £20.9bn, although adjusted annual core earnings rose slightly. Revenues have been falling year-on-year and the 2022 figure is some 13% lower than the £24.1bn reported in 2017.
Poor economic forecasts are likely to bring some further short-term pain. UK growth is expected turn negative and consumer spending is falling amid a cost of living crisis. Pay-TV is one of those nice-to-have products that may be among the first thing to go in struggling households. Britons may also look to spend less on their mobile phone and internet packages.
So, will it soar?
Will BT shares shoot up? I don’t think so. I’m concerned by its considerable debt and the impact of a slowing economy on revenues. So I won’t be adding this stock to my portfolio, despite the 4.2% dividend yield.
