Are BT Group plc And Glencore PLC Poised To Deliver Big Gains?

As BT Group (LSE: BT-A) prepares to swallow up EE and Glencore (LSE: GLEN) battles to reduce debt, is either stock likely to be a profitable buy this year?

Glencore battles on

It’s been a tough 12 months for investors in Glencore. Almost 70% has been wiped off the value of the firm’s shares.  Yet things could be worse.

Net debt is now on track to fall from about $30bn to $18bn/$19bn by the end of 2016. On 10 December, Glencore said that if prices remained unchanged, it would generate $2bn of annual free cash flow. The group expects to remain cash flow positive even at much lower prices.

Perhaps the biggest win so far is that Glencore’s commodity trading division seems likely to fulfil its promise of remaining profitable regardless of market conditions. Trading commodities is expected to deliver an adjusted operating profit of $2.5bn for 2015. Guidance for 2016 is similar, at $2.4bn to $2.7bn.

If Glencore can maintain these profits, then losses from its mining business should be manageable. The City seems to agree. Current forecasts show that a post-tax profit of $967m is expected for 2015, rising slightly to $1,071bn in 2016.

Glencore shares currently trade on around 15 times forecast earnings, with a 3.3% dividend yield forecast for this year. If the commodity sector is close to the bottom, then Glencore could be a reasonable buy.

The big risk, of course, is that we may not be close to the bottom. We could be at the start of a longer, deeper slump in commodity demand. There’s no way to be sure, which is why it’s probably sensible to limit your exposure to commodity stocks to a small part of your portfolio.

BT buys 25m new customers

BT announced this morning that the Competition and Markets Authority has approved the group’s £12.5bn acquisition of mobile operator EE.

The deal means that BT will acquire 25m mobile customers and take ownership of the UK’s largest mobile network. BT believes it can generate cost savings of £360m per year by the fourth year after completion, although it does expect to spend £600m to make these savings.

In my opinion, owning the UK’s largest broadband network and its largest mobile network should put BT in a strong position to take the lead in the quad play market. This means selling mobile, landline, broadband and television all in one contract. What’s less clear is how well the group’s shares will perform as an investment.

To fund the acquisition, BT will issue 1.6bn new shares to EE owners Deutsche Telekom and Orange, and take on £2.4bn of new debt. This means BT’s share count will rise by about 20%, as will the cost of its dividend.

BT’s own figures suggest that the acquisition of EE will make a positive contribution to the group’s adjusted earnings per share in the second year after the acquisition. I suspect it might be longer until the deal delivers significant returns.

City forecasts suggest that BT’s earnings per share will remain flat over the next couple of years and that dividend growth of 10%-plus will be maintained. This seems ambitious to me.

BT shares currently trade on around 15 times earnings and offer a prospective yield of 3%. I think there’s better value elsewhere.

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Roland Head 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.