Today I am looking at why I believe BT Group‘s (LSE: BT-A) (NYSE: BT.US) expenditure plans should deliver stunning long-term earnings expansion.
Huge investment programme paying off
BT Group has been chucking vast sums of money at its broadband operations in order to maintain its crown at the top of the UK internet space. The company’s multi-year drive to lay fibre across the country now connects 18 million homes and businesses, and this figure is set to march higher as its investment programme continues.
But equally interesting will be how BT chooses to continue taking on the might of British Sky Broadcasting, after the business
famously shelled out an eye-watering £897m last November for exclusive rights to show UEFA Champions League and Europa League soccer from 2015-2018.
The move to secure Europe’s premier international competition not only stole one of Sky’s crown jewels, but also significantly dented the football portfolio of ITV and Disney’s ESPN which have a monopoly on Europe’s second-string tournament.
Seemingly BT’s next natural target will be to expand its broadcast rights for the FA Premier League, the next auction for which is due in 2015. BT currently has permission to show 38 live games per season, but will be looking to significantly build on this number in the next round of bidding. But Sky is unlikely to be caught with its trousers down for a second time, and BT may be forced to fork out further monstrous sums to build its exposure to top-flight domestic football.
At the moment BT’s aggressive investment strategy is paying dividends. The firm’s BT Sport channels currently boasts more than 2.5 million customers, and the decision to offer these channels free to all broadband packages is also boosting new internet connections — indeed, the firm reported another record quarter of new fibre uptake during September-December.
Solid earnings growth on the horizon
BT Group has punched solid earnings growth in each of the past four years, with expansion running at a compound annual growth rate of 15.4% during the period. City analysts expect the heavy cost of its running ambitious drive to result in a fractional earnings uptick for the year concluding March 2014, however, results for which are due on Thursday, May 8.
Still, BT is expected to get back on track from this year onwards, with earnings increases of 9% and 8% chalked in for 2015 and 2016 correspondingly.
Such projections leave the company dealing on a P/E multiple of 12.8 for this year and 11.8 for 2016, representing a mere snip compared with a forward average of 21.8 for the entire fixed line telecommunications sector.
In my opinion BT has shown that it has the firepower, as well as the know-how, to cement its place as Britain’s premier triple-services entertainment provider. I fully expect the firm’s formidable cash pile to continue driving investment — and with it earnings — skywards in coming years.