With its full-year results on Thursday morning, BT Group (LSE: BT-A) (NYSE: BT.US) is expected to register its first top-line growth since 2009. It’ll need more than a mild rise in revenue to impress investors in the next few quarters.
Management have done a good job to get the group back on track, but they should consider a more aggressive investment strategy that would allow BT to outperform even during more difficult times.
Forward And Trailing Valuation
BT stock closed at £3.76 on Wednesday, for an implied market cap of £29.9 billion and an enterprise value of £38.4 billion.
Regardless of the outcome from the full-year figures that BT reports today, we don’t expect massive swings in these values. Its trailing trading multiples (2.1x EV/sales; 6.3x EV/Ebitda; 14.5x P/E) don’t differ greatly from one-year forward estimates (2.1x EV/sales; 6.2x EV/Ebitda; 13.2x P/E).
According to S&P Capital IQ consensus estimates, the company is expected to generate revenue growth barely in line with inflation into 2016, while its EBITDA margin will likely hover around 34%, yielding a 6% compound annual growth rate for earnings per share into 2016.
Barring extraordinary corporate activity, estimates suggest very little growth and a likely subdued performance for the stock. With a low beta and a 2.6% dividend yield, BT stock will likely mirror the market trends unless it takes a more aggressive stance on investment at this point in the business cycle.
Stock Price & Trading Multiples
Not only has BT rallied with the bull market since March 2009, but the trend of its stock price has been broadly mimicked by its EV/Ebitda trading multiple.
The P/E and the stock price of BT have likewise moved in synch in recent years. A deeper look at the spread between the two provides some guidance as to what could be next.
From May 2012 to May 2013, the gap had narrowed up to the point where it ceased to exist. As it happened, investors were willing to pay more for BT’s incremental earnings generation until a couple of months ago — but ever since, the spread has widened again.
To close the gap — and in order to convince investors to stick to their bet — BT must prove it can deliver more growth in future while keeping competition at bay, thus preserving margins. If it fails, the price to pay will be a further drop in its market value.
Capital expenditure is vital, and BT can certainly raise at least £2 billion of new debt to finance investment needs without having to worry about leverage ratios.
Two Scenarios
A technical analyst could argue that, with such a low level of volatility and five years into a bull market, any attempt aimed at predicting support and resistance lines is at least problematic. Yet certain critical levels for the stock can be clearly identified.
Under a best-case scenario, BT would break its resistance line at £4.10 by year-end, but for that to occur it’ll need a steeper growth rate in revenue and earnings. A worst-case scenario suggests BT stock would break its support line at £3.70 to hit £3.50 soon afterwards.
It would then continue its free-fall to £2.80 by the end of the year. But for that to materialise, a market correction is necessary.