BT’s (LSE: BT.A) share price is down 20% from its 25 July 12-month traded high of £2.23.
This does not necessarily mean that it is undervalued, as value and price are not the same thing.
Price is whatever the market will pay at any given time. But value reflects underlying business fundamentals. These, in turn, determine earnings growth.
So, how undervalued might BT be?
Earnings growth drivers
A risk to BT’s earnings is its margins being squeezed due to intense competition in the sector. Another is more regulation from Ofcom in an already deeply regulated sector that could erode profits over time.
However, a major structural tailwind for BT’s earnings growth is that it is well past the most expensive phase of its fibre rollout. Openreach is already available to 20.3m premises and is on track for 25m by December. With peak capex behind it, more revenue can now drop through to profit.
Demand for full‑fibre also continues to accelerate, with Openreach adding 1.1m full-fibre connections in the last six months alone. Take‑up has risen to 38% year on year, and average revenue per user (ARPU) is up 4%. As higher‑margin fibre steadily replaces legacy copper, this becomes a direct and meaningful lever for earnings expansion.
Another important driver is BT’s ongoing cost‑cutting and simplification programme. It has already delivered £3bn in cost savings — a full year ahead of plan. And it is now targeting a further £3bn of savings by 2029. This will boost EBITDA even in periods when revenue has dipped.
And finally, BT’s EE mobile network continues to outperform. It has been rated the UK’s best mobile network for 12 consecutive years, and 5G+ standalone coverage has reached 66%. A target of 99% is in place by 2030. A stronger mobile network supports ARPU, reduces churn and boosts profitability, adding another layer to the earnings‑growth story.
Given these factors, consensus analysts’ forecasts are that BT’s earnings will grow by an average 14.5% a year to end-2028.
How undervalued is it?
Assuming these forecasts are correct (although this is far from guaranteed), my discounted cash flow model (using a 9.1% discount rate) implies BT is 54% undervalued at its current £1.79 price.
Therefore, its ‘fair value’ could secretly be around £3.89 per share. Other DCFs may differ but that is more than double where the stock trades today.
And because asset prices tend to converge towards their fair value in the long run (again, not guaranteed), it suggests a potentially great buying opportunity to consider now if those analyst forecasts prove accurate.
Secondary confirmations of this are also evident in relative valuations with peers.
BT’s 0.9 price-to-sales ratio is second-lowest in its peer group, which averages 1.3. Vodafone is 0.7, Orange 1, Deutsche Telekom 1.1, and Telenor 2.4.
And its 18.8 price-to-earnings ratio is way below the 24.1 average of its competitors.
My investment view
I already own shares in BT, based on its strong long‑term earnings‑growth potential. That, in turn, should support both the share price and the already solid 4.5% dividend yield over time.
As nothing in the investment case has materially changed, I may well add more soon.
Given this combination of undervaluation, improving fundamentals and rising earnings, I also think the shares are well worth consideration from other investors.
