BT’s (LSE: BT.A) share price is changing hands close to its 23 May 12-month high of £1.79.
This may put off some investors from considering buying the stock, thinking it cannot rise much further. Others may see it as a good time to buy as bullish momentum appears to be in play.
Having spent years as a senior investment bank trader and private investor I know neither approach is helpful in investing.
When looking at a stock for potential share price gains, I am only interested in two things. First, its earnings growth forecasts, as this is what a firm’s share price is driven by over the medium and long term. And second, how much value remains in it as this affects how far that growth will drive the price.
Earnings growth outlook
Analysts forecast that BT’s earnings will increase 14.4% annually to the end of its fiscal year 2027/28. Its 22 May 2025 results showed profit after tax rising 23% year on year to £1.054bn.
‘Profit’ and ‘earnings’ both refer to a company’s net income, which is its revenue minus expenses.
BT continues to shift its focus towards building up its domestic business rather than its international one. It highlighted that its ambition is: “To become the UK’s most trusted connector of people, business and society”.
In this context, it has set new record build and connection highs, with its full-fibre network reaching more than 18m homes and businesses.
It raised its network build target by 20% to 5m UK premises in 2026, to reach 25m customers by then. By the end of the decade, its target is 30m customers. On the other hand, its 2% drop in revenue to £20.358bn was driven mainly by lower international sales.
A risk for the firm remains the intense domestic and international competition that may squeeze its margins.
Are the shares a bargain?
BT’s 0.8 price-to-sales ratio looks very undervalued against its peers’ 1.4 average. These comprise Vodafone at 0.6, Orange at 0.9, Deutsche Telekom at 1.4, and Telenor at 2.6.
It also looks undervalued on its price-to-book ratio of 1.3 against its peers’ average of 1.7.
I ran a discounted cash flow (DCF) analysis to work out what all this means in share price terms. This nails down the fair value for any firm’s stock price, based on future cash flow valuations for the business.
The DCF for BT shows its shares to be 66% undervalued at their present price of £1.74. Therefore, their fair value is technically £5.12.
Will I buy more of the shares?
I added to my BT holding in the run-up to the results, making it unnecessary to buy again now. I thought the numbers would be solid enough not to derail the key rationale behind my buying the stock in the first place.
This was that its earnings are likely to rise strongly in the future, driving its share price and dividends higher.
If I did not already own shares in BT, I would buy them now on the same basis. Although the price is at the high end of recent trading ranges, it still looks extremely undervalued to me.
Consequently, I think it is well worth investors’ serious consideration.
