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Why I feel now could be the time to buy into the BT share price

Roland Head
Traffic Sign for U-turn

It’s been a dismal few years for the UK’s biggest listed telecoms companies. BT Group (LSE: BT-A) and TalkTalk Telecom Group (LSE: TALK) — have both fallen by at least 50% over the last five years.

However, both businesses remain profitable and now have determined management teams who I rate highly. Today I’m going to look at the latest news from both firms and give my verdict on each stock.

A change of culture?

When Tesco boss Dave Lewis took charge in 2014, the company was shaken by an accounting scandal and falling profits. One of Mr Lewis’s first big decisions was to close the firm’s headquarters in Cheshunt and move staff to another nearby corporate office.

As well as saving money, I believe this was an important psychological step towards the change of culture that he wanted to implement as part of his turnaround plan.

For this reason, I was pleased to see this morning that BT has sold its London HQ for £210m and will be moving to a new London location within 30 months.

The money is a drop in the ocean when set against BT’s £11bn net debt. But my reading of this news is that chairman Jan du Plessis and new chief executive Philip Jansen are serious about making the changes needed to transform this business.

The right time to buy?

One area where I think BT is only just scratching the surface lies in integrating customers’ fixed broadband and mobile experiences. In my view, the group has a strong advantage over rivals here, as it owns the EE mobile network and the UK’s largest fixed broadband network.

I think this is one area where BT should be able to provide superior services in the future, hopefully supporting higher profit margins.

At the moment, I think the group’s financial position remains stretched. But BT has access to cheap funding and Mr Jansen has room to cut the dividend.

With BT shares now trading on 7.7 times forecast earnings with a yield of 7.9%, I think the shares look tempting as a long-term buy. I own some already and may add more over the coming months.

A potential double bagger?

Back in May, I suggested that broadband firm TalkTalk Telecom was starting to look interesting. A trading update today has confirmed my view that the company is making good progress since the return of founder Sir Charles Dunstone.

Interestingly, TalkTalk is also in the process of moving its HQ. In the meantime, the firm says that headline revenue rose by 1.3% to £387m during the first quarter, while average revenue per user edged up to £24.72.

More importantly, the net number of new customers signing up for fibre broadband rose to 118,000 during the first quarter, compared to just 67,000 during the same period last year. Chief executive Tristia Harrison says that fibre customers tend to pay more and be more loyal than non-fibre customers.

Analysts expect TalkTalk’s underlying earnings to fall 10% this year before rising strongly from next year. I remain concerned about the group’s £781m net debt, but I expect to see cash generation improve.

TALK stock doesn’t look cheap, on 19 times forecast earnings. But if the business continues to make progress, I think the 110p price tag could look good value in a few years’ time.

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Roland Head owns shares of BT GROUP PLC ORD 5P and Tesco. The Motley Fool UK has recommended Tesco. 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 2019