I believe that the BT (LSE: BT.A) the stock price could be undervalued by up to 50%, at current levels.
This analysis is based on the company’s current valuation and that of its peers, both in the UK and internationally.
Indeed, while the company doesn’t have many direct peers here in the UK, it does have plenty internationally. These operate in the same sector and have the same attractive qualities as the telecommunications giant.
One of the largest telecommunications companies in the United States is Verizon. This company is a favorite of billionaire investor Warren Buffett, and its presence extends across the country in fiber broadband as well as mobile.
Another example in Europe is Deutsche Telekom. This Germany-based group has an international presence and has a growing footprint in emerging markets.
Both of these companies are significantly larger than BT. Their revenues are about four times the size of the UK establishment. Still, I think these organizations provide an excellent benchmark for investors to analyze the company’s valuation and position in the market.
According to my analysis of international telecommunications companies, the average valuation is about 50% higher than that of the BT share price. This is based on the enterprise value/earnings before interest, tax, depreciation and amortization (EV/EBITDA) ratio.
I think this ratio is more appropriate when analyzing telecom companies, as it takes into account a few factors that the price-to-earnings (P/E) ratio ignores. The ratio takes into account corporate debt and the cost of maintaining telecom equipment.
None of these factors are reflected in the P/E ratio, which can be a significant downside. Investors should take into account the high cost of maintaining telecommunications equipment and the relatively high levels of borrowing these companies tend to have.
BT share price valuation
BT’s international peers are trading at an EV/EBITDA ratio of around 8, based on my analysis of companies that have a similar position in their respective markets.
Small businesses may be able to achieve a higher valuation if they target more profitable consumers. It’s something that BT, Verizon and Deutsche Telekom tend to avoid.
At the time of writing, BT’s stock price is selling at an EV/EBITDA multiple of 5.5. That’s a 50% reduction from the peer average.
Of course, there are reasons why investors may not want to pay a higher multiple for the company. He has a lot of debt and massive pension obligations. These will become increasingly pressing as interest rates rise.
The company will have to shell out more money to meet its obligations to its creditors. Competition in the UK telecommunications market is also increasing, which will present another challenge for the company in the coming years.
Nonetheless, given the company’s updated valuation, I think BT’s stock price looks incredibly attractive at current levels, even after taking these risks into account.
As such, I would be happy to buy the stocks in my portfolio today as a value play.
The post Why I Think BT Share Price Is 50% Undervalued appeared first on The Motley Fool UK.
Rupert Hargreaves has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.
Motley Fool United Kingdom 2022