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BT’s (LSE: BT.A) share price has dropped a long way from its 13 May one-year high of £2.42. However, the drivers behind this look to me like short-term, sentiment‑driven headwinds, not signs of a long-term structural deterioration.
The underlying fundamentals that power any share’s price over the long run remain in place. These are sustained profit growth, enduring cash flow expansion, and steadily rising returns on capital.
So is now the time for me to add to my long-term holding at a bargain price?
What’s pushed the stock down?
The summer brought a sharp re-rating across global telecoms, not just the UK giant. This was triggered by the valuation cut to Airtel Africa’s planned Airtel Money IPO from $10bn (£7.6bn) to $8bn–$9bn.
Telecoms regulator Ofcom added to the pressure by proposing to block BT’s new Openreach wholesale discount scheme. This pricing model enables traditional telecoms firms greater ability to compete against alternative network providers.
Finally, market unease was compounded by BT’s £20bn net debt, with UK interest rates projected to increase.
Short-term sentiment or structural fault?
However, the re-rating of the UK telecoms sector, triggered by that Airtel Africa’s trimmed IPO valuation, is a false equivalency. Airtel Africa operates a highly localised, emerging-market mobile money division exposed to frontier-currency volatility and entirely different consumer dynamics.
By contrast, BT’s a mature, defensive western utility whose core cash flows are tied to essential UK digital infrastructure. So applying that discount to BT is a lazy assumption by the market that only adds value to the firm’s share price, in my view.
Similarly, despite Ofcom’s decision, the fact remains that BT’s Openreach has already passed 23.5m out of its 25m completion target. So the UK telecoms giant has effectively already won the UK fibre build-out race over the alternative networks.
As for the debt, BT’s heavy spending phase on infrastructure build-out is ending, as the 2026 targets are met. Consequently, BT should very soon hit an inflection point where free cash flow will expand dramatically.
So what sort of profit growth’s in view?
Of course, there are longer-term risks to BT, as with any firm. BT’s a prime target for state-sponsored cyber warfare, which could result in financial penalties from regulators, litigation costs, and an expensive security overhaul.
Another longer-term risk is any escalation in geopolitical tensions that forces a sudden, mandatory replacement of foreign hardware components. That would introduce unbudgeted, multi-million-pound spending that would eat into profits.
Nevertheless, analysts forecast BT’s profits will rise by a yearly average of 9.8% over the medium term at minimum.
Where should the shares be trading?
Discounted cash flow (DCF) analysis identifies where any stock should trade — its ‘fair value’ — by using future cash flows and discounting them to today’s value. The more uncertain those forecasts, the higher the discount, which can lead to different DCF outcomes from analysts.
My modelling, including an 8.5% discount rate, shows BT shares are 59% undervalued at their current £1.96 price. That implies a fair value of £4.78. And history shows that share prices tend to trade to their fair value over time.
Consequently, I will be adding to my BT holding very soon and think they’re worthy of other investors’ attention too.
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Simon Watkins owns shares in BT.
This story originally appeared on Motley Fool
