BT shares are reacting favourably to the news that the group wants to re-enter the mobile market, as part of a strategy to offer bundled packages to consumers, reducing the risk of defection and maximising the value of the group’s heavy investment in content. BT looks set to gamble on quadruple play, which creates an interesting strategic and share price contrast with Vodafone.
BT’s valuation is now at very high levels relative to peers, but EPS Momentum has turned positive and the shares remain below the longer term trend in EPS Momentum. BT is attempting to pull off a similar re-rating trick to that accomplished by Vodafone, at a time when the latter’s earnings profile means it is entering the delivery phase of its transition.
On an EV/EBITDA basis, BT on 5.4x 12 months forward is at a 6% premium to the telecommunications services sector, which is an unprecedented level. In absolute terms its rating has been higher, at 6.4x during Q2 this year and over 6x from April through October 2007. The current level is a 13% discount to the UK market. EPS Momentum is +0.2% for BT, having turned positive this month. The chart above shows that the share price tracks the trend in 12 months forward earnings rather well and that arguably the shares are a touch under trend at the moment. On a PE basis, at 60% of the sector, BT’s valuation is at depressed relative levels and the 5% discount to the market is at the lower end of its average range.
The move into mobile may be the catalyst to trigger a re-rating of the shares. Vodafone, which shows little interest in quadruple play (mobile, broadband, fixed line and TV), has re-rated from a 40% PE discount to the sector at the beginning of the year to a 55% premium, as a result of its cash return and expansion plans funded by the disposal of its US business. EPS Momentum at Vodafone is an impressive +4.4%, which is in the top 10% of the sector across Europe. However, now that the earnings adjustment to the new group structure is complete, it may be time for a reckoning between the share price and earnings trends, which has happened already this year.
Over the past year, BT has outperformed Vodafone by 8%, but as recently as mid October its outperformance was twice the current level. The telecoms companies are placing big bets on changing consumer behaviour, with uncertain outcomes for both them and investors. The latter have shown a willingness to buy a compelling story about corporate change. BT may be taking its turn in the limelight as storyteller supreme.