BT Sales Improve But Stock Still Overvalued say Analysts

BT's main revenue driver remains the consumer division, where revenue jumped 11% year over year, but analysts say the telecoms stock remains slightly overheated

Allan C. Nichols, CFA 1 February, 2016 | 2:58PM
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BT Group (BT.A) reported improved fiscal third-quarter results, but the nine-month figures remain in line with our full-year projections. We expect to maintain our fair value estimate and our narrow moat rating. The firm's revenue increased 3% in the quarter, but was flat through nine months versus our full-year projection of a slight decline, excluding the acquisition of EE, which closed on January 29.

BT actually added fewer broadband customers than its arch rival Sky

The main revenue driver remains the firm's consumer division, where revenue jumped 11% year over year. This was driven by a 23% increase in broadband and TV revenue and a 5% improvement in calls and lines. We are pleased to see good growth here, but remain sceptical regarding the return on the costs for sports and other programming driving this growth. We also think that BT's discussion of its broadband growth, while presumably technically correct, is misleading. The firm reported that it added 130,000 retail broadband customers, "representing 71% of the DSL and fibre broadband market net additions."

This implies that it is dominating the broadband addition market. However, BT actually added fewer broadband customers than its arch rival Sky, which gained 144,000 despite losing the Champions League to BT. BT can make the above claim only because most of the other broadband providers lost customers in the quarter. The extra programming costs pushed the division's operating costs up 12% for the quarter.

The firm's other divisions saw small revenue increases or decreases, but nothing overly material. Order intake for most was a bit light, but this tends to be lumpy, and we don't view it as a concern. For BT as a whole, the earnings before tax margin came in at 34.6%, versus our full-year projection of 35.2%. However, the firm's best margins are historically in the fourth quarter, so we anticipate the whole year being close to our projections. We believe the shares are a bit overvalued at current levels.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BT Group PLC147.70 GBX-1.43Rating

About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.

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