What’s going on with BT shares?

BT shares have been falling in recent months, plagued by a number of issues. But is this now a bargain, or a potential value trap?

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BT (LSE:BT.A) is a British multinational telecommunications company. It is one of the largest telecommunications companies in the world, with operations in over 180 countries. BT shares have been sliding for months since investors opted for those with greater growth prospects as market positivity returned. But is this a potential buying opportunity, or is there more pain ahead for investors in the shares?

How does the company work?

BT’s business is divided into four main segments:

  • Consumer: provides fixed-line, mobile, and broadband services to consumers in the UK
  • Business: fixed-line, mobile, and cloud services to businesses in the UK and around the world
  • Global: manages network services to businesses around the world
  • Openreach: owns and operates the UK’s national broadband network

BT is a well-established and diversified telecommunications company with a strong track record of profitability. BT is also a dividend-paying company, rewarding investors with a steady 6.5% from their investment per year.

What’s been going wrong lately?

BT is facing some major challenges in the short term. In addition to the cyclicality and regulatory risks in the telecommunications sector, the company has been exposed to rising costs, which have clearly hurt its margins. BT is also facing increasing competition from other telecommunications companies.

BT announced a new CEO in late July, and has been the subject of takeover rumours. However, neither has been able to turn around the continued decline in the share price.

Is there a turnaround in sight?

With the share price trending towards the 52-week low of 110p, I suspect there is a critical moment ahead. Either the share price falls below this price, potentially leading to further pain for investors, or a gradual recovery may emerge.

From a valuation perspective, BT is now well in bargain territory. A discounted cash flow calculation suggests the shares may be 72% undervalued at present. Furthermore, the price-to-earnings (P/E) ratio of 5.9 times is well below the average of the telecommunications sector at 14.7 times.

However, with earnings expected to decline by 8% over the next year, investors are understandably staying well clear. With an enormous debt of £18.5bn, and rising interest rates, this will be a major concern for investors. If the debt levels cannot be resolved, and investors stay on the side-lines, the company may be forced to pass costs onto customers, again another slippery slope.

Could an investment be worthwhile?

Some elements of BT appear well-positioned for long-term growth. The company has a strong brand, a loyal customer base of over 28m, and a deep understanding of the industry. BT is also investing in new technologies, such as 5G and AI, which will help it to grow in the future.

If BT can gradually prove that debt levels are under control, and build fundamentals, then investors seeking a reliable dividend may return to the company. However, until I see these signs of recovery, I will be staying clear. I do not wish to fall into a value trap, where an undervalued company continues to decline.

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.

Gordon Best 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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