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Why the BT share price rose 8% in September

Shares in BT (LSE: BT.A) jumped 8% in September outperforming the FTSE 100 by 5% excluding dividends.

Unfortunately, despite this positive performance, the stock is still underperforming the market year-to-date. Shares in BT are down around 25% excluding dividends since the beginning of 2019, compared to a gain of 10% for the FTSE 100.

Still, it looks as if market sentiment towards the business is finally starting to change. At the end of August, buyers began to return, and since August 23 the stock is up 13%, outperforming the FTSE 100 by 10%.

The question is, has BT finally started to turn a corner or is the recent performance just a bubble that could soon pop?

Company turnaround

Unfortunately, the BT share price has been rising without any significant news flow. That suggests that this rally is based on nothing more than hot air.

BT has been trying to restore investor confidence in the business since the beginning of 2018 after the stock hit a six-year low on weak earnings. These problems cost former CEO, Gavin Patterson his job.

The company is now trying to position itself for the 21st century. The telecoms group has agreed to sell its London HQ near St Paul’s Cathedral for £210m as part of this plan, as well as putting several regional properties on the block.

BT is also slashing 13,000 jobs across the group and is promising to invest billions in rolling out fibre broadband to homes across the UK.

Still, as I’ve mentioned above, it is too early to tell if these efforts to turn the group’s fortunes around are starting to work. BT’s latest set of results showed a 5% decline in earnings before interest, tax, depreciation and amortisation for its fiscal first quarter.

Overall revenue declined 1% year-on-year to £5.6bn, with profits before tax down to £642m from £704m a year earlier because of higher costs. For the full year, City analysts are expecting earnings per share to decline 14%, the firm’s fourth consecutive year of falling profits.

Too early to tell

Based on all of the above, I think that while shares in BT look cheap, the group’s outlook is still shrouded in uncertainty. That makes it difficult to recommend the stock right now.

Indeed, shares in BT are currently dealing at a forward P/E of just 7.3 and support a dividend yield of 8.5%, but with the company warning that it could cost as much as £30bn and require an additional 30,000 workers to deliver full-fibre broadband nationwide by 2025 (as promised by the government) there’s no guarantee that BT’s earnings won’t fall further from current levels. The additional cash requirement could also force management to slash the firm’s dividend.

The bottom line

So overall, while the BT share price beat the market in September, I think it’s unlikely that this performance will continue. The company’s outlook is just too uncertain and, as of yet, we don’t know if BT’s turnaround efforts will bear fruit.

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Rupert Hargreaves owns no share 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.