A FTSE 100 member, BT Group (LSE:BT-A) is a telecommunications giant best known for its BT Sport and EE brands (and, of course, the BT brand itself). I want to look closer at this firm to find out if it’s cheap in comparison to its biggest competitors. Similarly, should I be adding this business to my long-term portfolio? With takeover rumours and potential joint ventures, is the current BT share price exceptional value?
Is the BT share price a bargain?
By looking at price-to-earnings (P/E) ratios, found by dividing the share price by earnings, I can better understand if a company is under- or overvalued.
BT currently has a trailing P/E ratio of 18.1 and a forward P/E ratio (the latter being calculated by dividing the share price by forecast earnings) of 9.32.
By comparison, telecommunications rival Vodafone has a forward P/E ratio of 12.85. Furthermore, Indian giant Tata Communications has a trailing P/E ratio of 21.05. Both of these figures are markedly higher than BT’s P/Es.
This is an indication that the current BT share price is a bargain. This is extremely appealing to me as a potential investor.
Competition and a positive outlook
The new merger between Virgin Media and O2 is also challenging BT in the broadband segment. Virgin Media and O2 are promoting their new product, Volt, with a multimillion-pound advertising campaign.
This means increased competition and could crowd the market even more, potentially shrinking BT’s market share.
However, BT has already planned to invest £15bn to expand its fibre network product to 25 million homes by 2025.
Furthermore, investment banks are beginning to look more favourably on BT. In February, Berenberg increased its price target from 200p to 225p.
The main reason that the bank increased the price target is because around two-thirds of BT’s revenue is linked with inflation. Furthermore, it expects normalised free cash flow to grow by 23% between 2022 and 2023.
Similarly, JP Morgan stated that it thinks BT is well-equipped to deal with the current macro environment of interest rate hikes and inflation. It may increase its price target in July.
A potential joint venture and possible takeover
BT is also exploring the possibility of a joint venture with Discovery Communications in sports streaming. This may allow the company to benefit from popular channels, such as Eurosport UK.
Since December, I’ve also had my eye on the actions of French telecommunications mogul Patrick Drahi. That month, he doubled his stake and now owns about 18% of the firm.
There’s the possibility that Drahi is attempting a slow-motion takeover, but I’ll have to wait until the summer to find out his true intentions. This is due to UK takeover regulations.
If Drahi does increase his stake further, this could cause the BT share price to surge, as tends to happen during takeovers.
But that’s not why I’ll buy. Overall, this is a strong business. The normalised free cash flow outlook is positive and the current BT share price may be cheap. I will be adding this company to my long-term portfolio.