Via Yahoo Finance

I’ve had mixed thoughts about BT (LSE: BT-A) over time. The company, in my view, spent years over-stretching itself, for example with spending on TV content. And it didn’t keep a close enough eye on the balance sheet. But I think current management has a better grip on what’s best for the long term. Yet the BT share price has crashed by 45% so far in 2020.

We’re looking at P/E multiples of around five, which suggests big trouble. Now, I’m not saying there aren’t any problems at BT. But are they bad enough to warrant a valuation that’s so low you’d think investors are expecting it to go bust?

The company suspended its dividend, along with other FTSE 100 firms in the Covid-19 crisis. And that added to the BT share price woes. But I think it’s one of the best moves the board could have made. Why? Well, the pandemic lockdown is hurting businesses across the board. And cutting dividends is to preserve capital that could be needed for the fight back.

Capital preservation

But BT has been in desperate need of capital preservation for years. No, decades. Before the dividend suspension, and even with the BT share price in freefall, BT was paying 15.4p per share. In 2019, with earnings dropping for several years in a row, that was covered 1.7 times by earnings. That might be fine for a cash-cow company, with no need for vast quantities of cash for technological development and expansion. And with no debt.

And that’s the killer. BT’s old style of financially reckless management has resulted in a vast pile of debt. At the end of the first quarter, it had £18bn of net debt on its books. That’s approximately 2.5 times estimated annualised EBITDA, and I think it’s got to come down. BT, in my view, should maintain a dividend moratorium until that ratio is significantly lowered. I’d like to see it paid down as low as 1.5x, but at least below 2x. That might be optimistic, as most FTSE 100 boards put way too much priority on stuffing their shareholders’ pockets with short-term cash.

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BT share price too pessimistic

Anyway, now I’ve given the company a drubbing, why do I see the BT share price as a buy? Well, BT’s problem is debt, but everyone already knows all about that. Yet I think investors have done what they typically do during a bear market. They’ve built the bad news into the BT share price and then added a whole load of extra pessimism for good measure. In short, I think BT shares are significantly undervalued, even considering the debt.

BT is in an expanding market, especially with 5G technology really just in its infancy. I’ve said for years, ever since before the dotcom boom, that the internet is in its infancy, and I still think that way. The Covid-19 lockdown, with the growing-but-still-small move to online everything, has shown that we’ve really only advanced a little way into that infancy even today

The firm now has a great opportunity to get it right. And I think the BT share price really is too cheap to miss.

The post Why I think the BT share price is too cheap to miss appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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