Over the course of the last year, BT (LSE: BT-A) (NYSE: BT.US) has been a very strong performer, with its share price rising by 21%. Part of the reason for this is optimism regarding its move into quad play, with it now offering landline, broadband, pay-tv and mobile phone services. Plus, the acquisition of EE beefs up its mobile offering and appears to put it on the front foot when it comes to which company (or companies) will dominate the quad play space. However, BT is not the only company following this strategy. The likes of Sky and Vodafone are also diversifying their services and, crucially, both of these new rivals have very deep pockets. As such, BT appears to be paying top dollar for sports rights such as Champions League football and Premier League football.
Furthermore, BT is having to compete on price for products such as superfast broadband in order to win more new customers than anyone else so as to be able to cross-sell them its other services. This may have a positive impact on sales, but it could mean that BT’s margins come under pressure in the short to medium term, with high levels of competition and significant investment hurting the company’s profitability over the next couple of years.
In fact, BT’s bottom line is set to be just 1.3% higher in financial year 2017 than it was in financial year 2015. Meanwhile, the wider index is expected to grow in the mid to high single-digits per annum during the same time period. And, with BT having a price to earnings (P/E) ratio of 15.3, its shares may struggle to post strong gains over the next couple of years.
As such, it could be worth looking for better opportunities elsewhere. For example, the improving outlook for the UK economy is set to catalyse online automotive seller, Auto Trader’s (LSE: AUTO), bottom line, with it forecast to rise from 4p per share last year to 13p per share next year. That’s a superb rate of growth and, best of all, Auto Trader has a price to earnings growth (PEG) ratio of just 1.3, which indicates that its shares could move much higher and also offer a relatively wide margin of safety in case the company’s performance is not as impressive as is currently being forecast.
Similarly, the AA (LSE: AA) could see its share price move higher despite being up two-thirds in the last year. In fact, its PEG ratio of 0.6 indicates that it remains excellent value for money at the present time, with its diversified offering helping to also provide relative stability over the medium to long term. And, with dividends per share due to rise by 22% next year, it could become a very valuable income stock even though it currently yields just 2.9%.
Meanwhile, spread betting and financial services provider, IG (LSE: IG), yields an even more appealing 4.2%, with dividends being covered a healthy 1.4 times by profit. Furthermore, IG is expected to post double-digit earnings growth in each of the next two years, which puts its shares on a PEG ratio of just 1.6, which means that they offer growth, value and income at the present time.
As such, IG, AA and Auto Trader seem to be far better buys than BT right now and, in addition, the analysts at The Motley Fool have unearthed another stock that they feel could be a star performer moving forward. In fact, they've written a free and without obligation guide all about it called 1 Top Small-Cap Stock From The Motley Fool.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.