The BT (LSE: BT.A) share price has been falling for almost five years now. And the relentless decline has thrown up some interesting valuation numbers.
Has the BT share price fallen too far?
For example, with the share price near 112p, the forward-looking earnings multiple for the trading year to March 2022 is just below six. And the price-to-book value is running around 0.75.
However, there are a few problems. One is that earnings have been sliding lower since 2017. Another is the company carries a ton of debt. If you adjust for the firm’s borrowings, the earnings multiple shoots up to the high teens. So maybe BT isn’t as cheap as it looks.
But there’s no denying the last time we saw the share price as low as it is now was in the aftermath of last decade’s financial crisis. From the lows of early 2009, the stock embarked on a graceful climb to the heights achieved in 2015. And, of course, it’s always possible a recovering economy could see BT regain its mojo with earnings.
Maybe it’ll begin posting annual advances in earnings like those that drove the last bull run in the stock. However, there’s precious little evidence of a turnaround in fortunes so far. The best City analysts can manage is an insipid prediction that earning might advance by around 4% next year.
In the first-quarter results delivered at the end of July, The narrative was all about the negative effects of the Covid-19 pandemic on the business. Chief executive Philip Jansen said in the report that after this year, he expects the business will return to sustainable adjusted EBITDA growth. However, he thinks progress will be “driven in part” by the recovery from Covid-19.
Why BT’s challenges may be greater than Covid-19
But I think BT has a bigger problem to deal with. The business requires heaps of capital investment just to stay in the game and that’s probably why the debt-pile has grown so large. I’m unconvinced that meaningful rises in earnings will arrive any time soon. The shares were falling along with earnings long before coronavirus arrived. And I think it’ll take much more than recovery from the pandemic to turn this stock around.
To me, BT looks more like a value trap than a once-in-a-decade ‘buy’. I’m being cautious about the shares and will watch from the sidelines for the time being. However, I agree the potential for a turnaround in the business and the shares exists. But I don’t think we need to be hasty to act. BT will likely give us plenty of warning that a recovery is underway.
Before buying the shares, I’d look for an indication of recovery in the trading figures. I’d also want to see an end to the downtrend in the shares and some form of consolidation on the chart. On top of that, a change in tone to more bullish outlook statements and the start of an uptrend in the stock would encourage me to re-evaluate BT with a view to buying the stock – but we’re not there yet.
