Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at BT (LSE: BT-A) (NYSE: BT.US) to ascertain if its share price can return to 1,513p.
Initial catalyst
Of course, be we can establish whether or not BT can return to 1,513p, we need to figure out what caused the company’s share price to reach this level in the first place. It would appear that BT reached this high on the last trading day of 1999, amid a wider FTSE 100 rally as the market was swept up in the technology bubble.
Indeed, it appears that investors were prepared to pay a premium for BT’s shares as they believed that the company would play a key part in the internet revolution. In particular, at a price of 1,513p BT shares were trading at a historic P/E of 33.
However, after reaching 1,513p, within the space of three years BT’s shares had fallen to a low of 157p, following what was then record breaking £5.9 billion rights issue. What’s more, due to the size of this rights issue, BT’s management had to offer the new shares at a deep discount of 49% below the company’s share price on the day the cash-call was announced.
But can BT return to its former glory?
Since the turn of the century, the UK telecommunications industry has changed significantly and BT no longer dominates the industry, like the company did when it reached 1,513p. In addition, as a result of the company’s rights issue, BT’s earnings per share figure, a key metric for placing a value on the company’s shares, was cut in half.
Sadly, a combination of these two factors has weighed on both BT’s share price and profitability during the past decade. For example, BT’s profit is still around 30% lower than it was during 1999 and the company’s earnings per share are 50% below their 1999 peak. In particular, BT reported earnings per share of 25p for 2013 on net income of £2 billion, whereas for full-year 1999, the company’s net income was £3 billion, which gave an earnings per share figure of approximately 47p.
Overall, this implies that BT would have to double its earnings per share in order to justify a return to 1,513p. Although not impossible in the long term, this looks highly unlikely in the short term.
Still, BT’s drive into the pay-TV market has been a lifesaving move for the company and the company’s net income has doubled during the last three years — impressive but not enough to justify a 1,513p price tag.
Foolish summary
So overall, I feel that BT cannot return to 1,513p.