Hot Stock: BT Group

Mobile growth opportunity

(Courtesy BT Group)

(Courtesy BT Group)

Competition has always been a problem in the Canadian telecom sector and not just for consumers. Investors don’t have a ton of businesses to choose from either and while companies like Rogers, Bell and Telus are all solid operations, they don’t come cheap. That’s why some experts are recommending people look outside of Canada. Not only are there more options, but many telecoms are undervalued too.

One company that a number of analysts like is London-based BT Group (LON: BT.A). It’s one of the largest telecoms in the world—it operates in more than 170 countries worldwide—and sells mobile, broadband, cable and fixed-line services. Partly because of its European address, this business has a PE ratio of about 12.7 times, which is much lower than the 18 times Telus is trading at or Rogers’ near 15 times earnings.

Part of BT Group’s attraction is its aggressive fibre optic broadband rollout, similar to what Bell Canada has done here. James Britton, an analyst with Nomura Securities, expects its fiber optic network to cover 90% of U.K. homes and he expects 30% of households to sign on to the service by 2016.

He also says there are gains to be made in the mobile area. It doesn’t have much a presence in the consumer space, but millions of its broadband users do use cell phones. He thinks that once it does make more of a push into the retail market, it will be able to steal business away from its competitors. “The opportunity for profitable growth is substantial,” he wrote in a March 22 report.

The company has also been able to successfully reduce costs, which has been a main driver of earnings momentum. It cut about 4.5% of costs since the start of 2013 and it slashed 5.1% in 2012. If it can remain an efficient operation, and reduce costs further, then Britton expects we’ll see a 12% upside in 2015 earnings.

Robin Beinenstock, an analyst with Bernstein Research, points out that BT Group has had major issues around pension funding, but the worst is behind it. “The pension will likely require higher payments… but the deficit is greatly reduced from the bad old days,” she wrote in a May 9 report. She thinks it will have to top up payments by between £360 million to £655 million in 2015, but it’s still in much better shape than it used to be.

Although the stock is undervalued compared to Canadian telecoms, the dollar price isn’t cheap. Right you can buy shares for $317 on the London Stock Exchange. However, if analysts are right, the stock price should climb over the next 12 months. Britton has a $375 price target on the stock, while Bienenstock has a $325 target. Some analysts think it could get as high as $380. In the meantime, collect its 3.02% yield.