Investor sentiment has been against BT (LSE: BT-A) for a number of years. Indeed, this year alone the value of the company has almost halved. When a stock is this out of favour it can often produce high returns for investors. I think we’re looking at such an opportunity right now. Here are five reasons I’d buy BT shares today.
BT shares are dirt cheap!
UK telecoms companies have endured multi-year downgrades in earnings. Competition, retail price deflation, and rising capital expenditure are some of the factors that have contributed to this.
In the case of BT, analysts’ earnings-per-share (EPS) forecasts have come down by around 50% over the last five years. There’s been an even bigger decline in BT’s share price. In other words, the company’s price to earnings (P/E) ratio has fallen into the bargain basement. It’s currently just 5.5, based on EPS forecasts for its financial year to March 2021.
I think many of the multi-year-downgrade factors have now largely played out. In my book, this makes BT’s shares dirt cheap. I’m not the only one who thinks so.
Directors have been filling their boots
Through the pandemic market crash, many of BT’s directors have been buying shares like nobody’s business. Chief executive Philip Jansen has snapped up over 1.8m. The wife of chairman Jan du Plessis has snaffled away 500,000. And a handful of other non-executive directors have bought getting on for 300,000 between them.
This tells me BT’s board reckons the shares are cheap. And it looks a clear signal that insiders are highly optimistic about the company’s future.
During this period, we’ve also seen a story that BT’s had talks about selling a multi-billion-pound stake in its Openreach arm. Plus a report that Saudi Arabia’s sovereign wealth fund has been buying up shares too.
BT denied the Openreach talks in a somewhat convoluted manner. Meanwhile, if the Saudi fund has indeed been accumulating shares, it’s kept its holding below the disclosable level of 5%. Nevertheless, at the very least, these reports hint that some major institutional investors are interested in BT at its current valuation.
Near-term catalyst for a rise in BT shares
The company’s set to release its first-quarter results tomorrow. A number of European peers have already reported, posting earnings ahead of analysts’ expectations.
A repeat of this by BT could provide a near-term boost to its share price. Particularly as the stock trades at a discount to those European peers. However, it’s the longer term where I see the real potential of big gains for buyers of BT shares today.
Prospects of a major re-rating
The market hates uncertainty. It’s been crying out for greater clarity on BT’s prospects.
We should get it in the coming months. I think we’ll see confirmation of a favourable regulatory outcome for BT’s Fibre-to-the-Premises plans. I also expect the company to start securing wholesale deals with the UK’s major service providers.
Finally, at some point, I expect BT to provide the market with explicit and detailed guidance on its medium-term earnings targets.
In summary, I believe BT’s shares have overshot on the downside. I rate the stock a long-term buy today, because I see a double driver for a strongly rising share price. Namely, long-term earnings growth and a re-rating to a much higher P/E.
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.