Having been a long-term bear when it comes to BT Group (LSE: BT-A), I wasn’t shocked to see the telecoms titan’s share price drop in 2018.
Its market value shrunk 11% last year as concerns over the state of its transformation strategy came to the fore, and consequently it finished the year at 238p per share. A similar percentage decline would see it fall to around 212p, dragging it perilously close to the psychologically-critical level of 200p.
And I believe a drop through this level, which would itself likely result in huge swathes of selling pressure, is a very real possibility in 2019.
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Fresh Brexit fears
BT’s descent last year would have been worse had it not been for the mild euphoria stoked up by the announcement that chief executive Gavin Patterson would be replaced by Philip Jansen next month.
But investor appetite soured severely in December and the business failed to join in with the broader FTSE 100 rally this month, too, reflecting investor jitters over the state of Brexit negotiations. Revenues at BT have been under sore pressure in recent quarters as the political impasse has smacked the domestic economy. A recent report in The Guardian suggested another layer of trouble could be around the corner.
According to leaked minutes from a recent meeting between European Union officials and senior MEPs, the possibility emerged that the Footsie firm could see “sensitive” contracts with the continental trading bloc scrapped once the UK withdraws from the club. It could also stand to lose out on future contracts worth hundreds of millions of pounds.
I’m not about to commit a volte face, however, and stick by my belief that a no-deal Brexit is a very unlikely scenario. But if this occurs then the odds on BT losing out on these contracts will no doubt shorten considerably.
Plenty of problems
It’s not as if the telecoms giant has enough to worry about, of course. New head honcho Jansen has a variety of tough problems to tackle when he takes over next month: the tough economic landscape, rising competition across its Consumer division, the future of its capital-intensive BT Sport services, what to do with Openreach, how to tackle the long-running headache of its pension deficit (a problem which worsened with its defeat in the Court of Appeal last month on how it calculates pension increases for its members)…
Any potential benefits of strategic changes from the incoming chief introduces will likely take a number of years to become clear. In the meantime, City analysts are forecasting earnings drops of 6% in the year to March 2019 and 1% in fiscal 2020, continuing the chunky profits drops of the past several years.
The possibility of these underwhelming forecasts being downgraded is high, though, and I see little reason to invest right now. The likelihood of estimate revisions undermine the appeal of BT’s low current forward P/E ratio of 9 times, a blend of extended profits weakness and heavy debt pile, makes its prospective 6.6% dividend yield quite unappealing, too.
I’ve said before that the business may fail to meet broker predictions that the dividend will remain frozen at 15.4p per share and cut it, a scenario that would of course smash up the share price. In my opinion BT is a share that is really best avoided today.
