Image source: BT Group plc
The communications industry is at a critical juncture. With connectivity and digitalization at the heart of everything we do, companies are forced to evolve faster. Those who make bold moves may dominate this industry for decades to come. So there BT (LSE:BT.A) fits into the future of the sector, and what will it mean for the share price? Let’s take a closer look.
A sector under pressure
So what has put the company on my radar lately? UBS recently reiterated its “sell” recommendation, citing increasing competition from other network providers. Companies like CityFibre are expanding fiber networks at low cost, putting significant pressure on BT’s Openreach division. This competition could lead to a significant loss of revenue, with estimates that the company could lose up to £240m a year as CityFibre expands its footprint.
With so many people now seeking high-speed, quality connectivity every day, there is no shortage of demand. However, as the mobile phone industry has shown us, few companies can emerge victorious, as many new and old companies disappear.
The company also faces challenges from potential regulatory changes, high costs associated with infrastructure development, and many economic difficulties that could impact consumer spending.
Numbers
According to discounted cash flow (DCF) calculations, there could be up to 72.5% growth before the shares reach a fair value estimate. Potentially attractive, but when there is such a large gap between present and fair value, investors are clearly not comfortable with the future.
Many investors in the company will be attracted by the impressive dividend yield, which currently stands at around 5.5%. However, it is important to note that the dividend payout ratio is very high at 92%, which raises questions about long-term sustainability.
Earnings are forecast to grow at a healthy 11.6% per year. Continued investment in 5G and fiber broadband infrastructure positions the business well to capitalize on the growing demand for high-speed connectivity.
However, financial health presents a mixed picture. The company carries £23.4bn of debt, which is subject to high interest rates. Strong market conditions and consistent cash flow provide some reassurance, but with profit margins falling to 4.1% from 9.2% last year, there is something to do with the numbers.
Another good thing
Despite the competitive pressures, the company has a very strong product, and extensive infrastructure. Its acquisition of EE in 2016 further strengthened its position in the mobile market. This concentrated market situation offers some defensive features, which can bring benefits to new market entrants. The company has been around since 1846, so it has a history of managing adversity, and successfully implementing cost-cutting initiatives.
One for the watch list
Although the company faces significant challenges, its current valuation, high dividend yield, and potential for earnings growth make it interesting. For me, the next few years will depend a lot on how managers can effectively eliminate competition, but also how they can manage debt and take advantage of the growing need for high-speed connectivity.
As a naive investor, I’m keeping a close eye on BT, but I’m also aware of the risks. There may be some big winners in the social media industry in the coming decades, but I’m still not sure if the company has the right strategy to be listed.
Source link
