In October of last year, I turned positive on the outlook for the BT (LSE: BT.A) share price. After years of saying investors should avoid the stock, I believed the business’s valuation had fallen to such a low level it was too cheap to pass up.
As it turns out, this was the right call. Since the middle of October last year, the BT share price has jumped in value by 50%. And I think the stock could have further to run.
As I’ve been following BT over the past 10 years, the business has gone through several transformations. It started as a relatively dull telecoms business. Then the company tried to become the next Sky, spending billions on building a pay-tv network. By forking out enormous sums for the rights to stream sporting events, management believed customers would flock to BT’s pay-tv offer.
Customers did, but the battle for football rights between BT and Sky consumed vast amounts of capital. This was money the group should have been investing in its existing network.
As BT was chasing football rights, customers started leaving its core business. They flocked to cheaper competitors who offered better levels of service and lower prices. This is one of the reasons why the BT share price has performed so poorly over the past five years.
When BT’s former CEO, Gavin Patterson, stepped down at the beginning of 2019, it began to move in a new direction. A review inspired the business to commit to spending more on improving its existing offer.
I think this focus on doing what the company does best is the right course of action. That’s the primary reason why I’ve become so positive about the outlook for the BT share price.
Management is planning to modernise and simplify BT’s operations and product line. To that end, the firm wants to move customers onto new 5G and fibre broadband networks. It reckons it can reduce costs by around £1bn each year by 2023, rising to £2bn each year from 2025. This will cost about £1.3bn spread over five years, but I think the investment could be worth it.
If the company can pull this off and make the whole customer experience more user-friendly, I think its growth could accelerate. BT has all the core components to provide customers with a 21st-century communications package, pay-TV, high-speed fibre broadband and 5G connectivity through its EE division. Connecting these businesses and improving customer service could yield tremendous results.
BT share price risks
That said, the company does face some significant challenges. It has a lot of debt and a large pension deficit. Debt interest costs alone consumed £736m of cash last year.
What’s more, the corporation is facing the threat of the first national strike at the company since 1987 in a row over planned job cuts and site closures. A strike could blow up the organisation’s efforts to rebuild customer relations, especially when so many customers currently have to work from home. A large strike could have a serious negative impact on the BT share price.
Despite these risks and challenges, I’d buy the stock for my portfolio today, considering its long-term growth potential.
Rupert Hargreaves 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.