Why I think the BT share price is undervalued by 50%

I believe the BT (LSE: BT.A) share price could be undervalued by as much as 50%, at current levels. 

This analysis is based on the company’s current valuation and that of its peers, both in the UK and internationally.

Indeed, while the company does not have many direct peers here in the UK, it does have many internationally. These operate in the same sector and exhibit the same attractive qualities as the telecommunications giant. 

International comparisons

One of the largest telecommunications corporations in the US is Verizon. This company is a favourite of the billionaire investor Warren Buffett, and it has an expanding presence across the country in fibre broadband as well as mobile. 

Another example in Europe is Deutsche Telekom. This Germany-based group has an international presence and owns a growing footprint in emerging markets. 

Both of these companies are significantly bigger than BT. Their revenues are around four times the size of the UK establishment. Still, I think these organisations provide an excellent benchmark for investors to analyse the corporation’s valuation and position in the market. 

According to my analysis of international telecommunications enterprises, the average valuation is around 50% higher than that of the BT share price. This is based on the enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) ratio. 

I think this ratio is more appropriate when analysing telecoms companies because it considers a couple of factors that the price-to-earnings (P/E) ratio ignores. The ratio takes into account corporate debt and the cost of maintaining telecoms equipment.

Neither of these factors is reflected in the P/E ratio, which can be a significant drawback. Investors need to consider the high cost of maintaining telecoms equipment and the relatively high borrowing levels these companies tend to have. 

BT share price valuation

BT’s international peers are trading at an EV/EBITDA ratio of around 8, according to my analysis of companies that have a similar position in their respective markets.

Smaller companies may be able to command a higher valuation if they target more profitable consumers. That is something BT, Verizon and Deutsche Telekom tend to avoid. 

At the time of writing, the BT share price is selling at an EV/EBITDA multiple of 5.5. That is a discount of 50% to the peer average. 

Of course, there are reasons investors may not want to pay a higher multiple for the corporation. It has a lot of debt and massive pension obligations. These will only become more pressing as interest rates increase.

The enterprise will have to fork out more cash to meet its creditor obligations. Competition in the UK telecoms market is also increasing, presenting another challenge for the company in the years ahead. 

Nevertheless, considering the company’s discounted valuation, I think the BT share price looks incredibly attractive at current levels, even after taking these risks into account. 

As such, I would be happy to buy the stock for my portfolio today as a value play. 

The post Why I think the BT share price is undervalued by 50% appeared first on The Motley Fool UK.

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Rupert Hargreaves 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.