If I’d bought BT (LSE:BT-A) shares five years ago, I’d currently be sitting on a 70% loss. The company has struggled with its large debt pile, its failure to modernise quickly enough and with underinvestment in many of its key areas. BT revenues has also been hit by the pandemic, especially due to many customer cancellations for BT Sport. But despite these issues, the BT share price does look cheap, and there is some renewed optimism for the future. As such, what am I doing about it?
Trading update
Although profits were 17% lower than 2019, there were some positives to take from the third-quarter trading update. For example, net debt fell by £940m to £17.3bn. Although this figure is far too high, it is still promising to see that the company is reducing its debt pile. This is because I cannot see a return to dividend payments or increased shareholder returns until this happens.
The trading update also shed light on the modernisation programme within the company. This has included the sale of selected business units in Italy, the creation of a standalone procurement company and the creation of Digital (a unit focused on the development of innovative products), which will be effective from April 2021. All of these should help simplify the business and grow profits for the long-term. As such, I think there is scope for the BT share price to start clawing back previous losses.
Potential risks
A rise in the BT share price is far from guaranteed though. One issue facing the company right now is disruption, both within management and the workforce. Indeed, following the news of the upcoming departure of chairman Jan du Plessis, reports now indicate that the move came after a clash over the speed of change within the business. In order to make meaningful changes over the next few years, strong and decisive management is required. I’m not convinced about BT management right now.
The workforce is also an issue. The Communication Workers Union opposes some changes being made at the company due to likely job losses. As such, the 45,000 staff members are scheduled to vote on whether to take industrial action. This would be a major blow for the company and disrupt the modernisation process. The BT share price could therefore suffer as a result of this potential disruption.
Would I buy BT shares?
There is no doubt that the BT share price looks cheap. It has a price-to-earnings ratio of around 6 and a price-to-book ratio of under 1. This indicates that the shares may be undervalued and could see large gains over the rest of 2021. But I’m not buying today. The company still has a number of hurdles to overcome, and while the modernisation process looks promising, I would like to see some evidence of its effect first. As such, I’m looking elsewhere for now and will re-evaluate the BT share price in a couple of months.