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Should you double down on the BT share price?

Rupert Hargreaves
·3-min read
Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Close-up Of A Piggybank With Eyeglasses And Calculator On Desk

The BT (LSE: BT.A) share price has been one of the worst-performing investments in the FTSE 100 this year. Year-to-date, the stock is off around 50%.

Following this decline, the stock looks attractive from a value investing perspective. As such, I’m going to take a look at the business to establish whether or not investors should consider buying more of the stock at current levels.

BT share price on offer?

To start, I’m going to take a look at why investor sentiment towards BT has collapsed this year. The coronavirus pandemic has significantly impacted the outlook for many businesses. However, it has benefited telecommunications groups, which have become essential services as many companies have asked employees to start working from home.

We only need to look at BT’s latest trading update to see this trend in action. At the end of July, the company reported it expects revenues for the financial year ending March 2021 to fall between 5% and 6%. Compared to many other corporations, which have seen their revenues wholly wiped out in the pandemic, this is a relatively positive performance.

Based on these projections, analysts are expecting the company to report earnings per share of 18.5p for the year on a net profit of £1.7bn. This target suggests the stock is currently trading at a forward price-to-earnings (P/E) multiple of just 5.3.

Still, despite the company’s relatively right outlook and low valuation, investors continue to avoid the BT share price.

Multiple headwinds

I think investor sentiment has also been hurt by the company’s high level of borrowing. Also, management’s decision to cut the dividend didn’t help matters. Further, BT is also under pressure to invest more, which may lead to reduced shareholder returns for some time to come.

There’s no way to sugarcoat it, BT does have some severe problems. But I feel as if the company’s current valuation more than makes up for these risks.

BT is the largest telecommunications company in the country. While opponents are snapping at its heels, it’s going to be decades before any major competitor emerges. This gives the company an edge.

It would cost tens of billions of pounds to replicate BT’s existing network infrastructure. Even if the money were available, getting planning and regulatory permission would be another significant hurdle to overcome.

Therefore, I’m optimistic about the outlook for the BT share price. The company does have problems, but these are relatively insignificant compared to its competitive advantage. It also seems to me as if many of these concerns are already reflected in the stock’s depressed valuation.

As such, it might be worth buying BT as part of a well-diversified portfolio. Because the stock has historically changed hands for a P/E of around 10, there’s a possibility that when investor sentiment improves, the BT share price could double from current levels.

In my opinion, that potential reward is worth the risk of buying the shares.

The post Should you double down on the BT share price? appeared first on The Motley Fool UK.

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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.

Motley Fool UK 2020