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Why I think the BT share price could smash the FTSE 100

FTSE 100 telecoms group BT  (LSE: BT-A) shares are currently trading at less than half the price of their peak. The same goes for FTSE 250 gold and silver miner Hochschild  (LSE: HOC), which released its annual results this morning. Clearly, investors backing these stocks today could more than double their money, if the shares returned to their previous highs. But what are the prospects of them delivering on this potential?

Subdued

Hochschild’s share price was pushing towards 600p in 2011. The price of silver hit a high of over $45 an ounce that year and gold a high of over $1,800 an ounce. Today, we’re looking at prices of nearer $15 and $1,300, respectively. Meanwhile, Hochschild’s shares  are trading at under 200p (a little down on yesterday’s closing price after this morning’s results).

Despite the subdued metals prices, the company posted an underlying profit before tax of $38.4m on revenue of $704.3m. Earnings per share (EPS) came in at $0.05 (3.85p at current exchange rates) and the board declared a dividend for the year of $0.392 (3.01p). At the current share price, the price-to-earnings (P/E) ratio is an eye-watering 51.9, while the dividend yield is a skinny 1.5%.

Growth prospects

The good news is that City analysts are forecasting an 80% rise in EPS this year to $0.09 (6.92p), bringing the forward P/E down to 28.9. This gives an attractive price-to-earnings growth (PEG) ratio of 0.36.

Hochschild is a well-managed business, with a nice portfolio of low-cost-producing assets and significant resources for development. It would take a surge in gold and silver prices for its shares to double in short order, but because of its near- and longer-term growth prospects, I rate the stock a ‘buy’ at the current level.

Unpromising

Climbing to a post-financial crisis high of around 500p in 2015, BT’s shares are currently trading at 233p. In contrast to the high earnings growth forecast at Hochschild, analysts see BT’s EPS stuck in the region of 26p for its three financial years to 31 March 2021. Also, the consensus is for the dividend to be cut to 14.8p by that date, from a current 15.4p. On the face of it, the prospects appear unpromising for investors.

In BT’s favour is a P/E of just nine. And a dividend yield of 6.4%, based on the forecast payout cut. Now you may say the bargain-basement P/E is more than merited, due to the stagnant earnings outlook. And the yield isn’t much compensation, particularly as the payout would likely be lower than the current consensus 14.8p, if the dividend were to be cut. However, even if that proves to be the case, I see BT as an exciting turnaround story.

Transformation prospects

BT’s chairman Jan du Plessis, who has been in the role for little more than 15 months, previously helped steer Rio Tinto through a tumultuous decade. Chief executive Philip Jansen, who took up his post just three weeks ago, was formerly the head of Worldpay. Both are experienced in business transformation, and they have plenty to work with at BT.

I believe the potential for operational improvements, and bolder possibilities, including a partial break-up of the group, could lead to considerable upside for investors. It may take some time, but I rate the stock a ‘buy’ on the view it has scope to smash the return of the FTSE 100.

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G A Chester 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.