Does BT Group plc’s valuation reflect the risks it faces?

Could BT Group plc (LON:BT.A) (BT.A.L) offer investment potential due to its relatively low valuation?


With a P/E ratio of around 10, BT Group plc (LON:BT.A) (BT.A.L) is a relatively cheap share in my view. That’s not a major surprise to my mind, with the company’s share price having fallen by around 50% in the last three years.

Of course, the prospects for the business continue to be relatively uncertain in my opinion. Over the next two financial years, for instance, it is due to report falling EPS. This would make it five years in a row of falling profitability, which could call into question the strategy being pursued by the business.

Clearly, a new CEO may choose to implement a revised strategy. The business, though, is already seeking to deliver on its revised plan, with headcount reductions of 2,000 having been made in the most recent quarter. This could make the company more efficient and may lead to improving financial performance in the long run.

The change in CEO and the revised strategy being implemented mean that BT could experience a period of uncertainty in my view. Alongside its falling profitability, it may mean that there is a lack of a clear catalyst to improve its stock price performance in the near term.

Its valuation, though, may factor in these risks. As mentioned, it has a relatively low P/E ratio when compared to the rest of the FTSE 100. This could provide it with a margin of safety that may translate into a more appealing risk to reward ratio.

In the near term, I wouldn’t be surprised if further volatility is ahead for the company. It has a relatively downbeat financial outlook, while its risks seem to be higher than for some of its index peers.

However, with BT offering what seems to be a margin of safety, I believe that its shares may already factor in the risks it is facing to some degree. As a result, I’m upbeat about its long-term investment prospects, but believe that there could be volatility ahead in the near term.

About Robert Stephens 5151 Articles
Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email [email protected] or use one of the other contact methods available on the 'Contact Us' page