BT: a FTSE 100 share to buy before February?

Share on British Telecom (LSE:BT.A) has started the year on the front foot. The stock is up more than 10% and could see further gains in early February when it reports Q3 numbers. Even so, it’s not necessarily a buy in my portfolio.

Call up positive

After weathering the market downturn in the first half of 2022, BT shares dived in the second half as higher costs hurt the bottom line. However, a reversal may be on the cards as some investment banks are bullish on the stock.

That’s what he likes Citi, Goldman Sachsand Jefferies recently upgraded it to a ‘buy’ rating with an average price target of £1.67. This represents an increase of 30% from the current share price, and there are several reasons behind this renewed optimism.

The first is a wholesale price increase for internet service providers (ISPs) that use fiber optic cables. The second is the above-inflation price increase (18.3%) for broadband customers. These moves should help the company’s profits, and see net income begin to recover after three consecutive years of falling.

Lining up the number

But for the last quarter, the company expects to report a decline in revenue. High inflation continues to dampen consumer spending. But on the flip side, analysts estimate a 3% increase in group EBITDA as cost controls come into effect.

Metric	Q3 2023 (Agreement)	Q3 2022	Projected growth
Group income	£5.24bn	£5.37bn	-2.5%
EBITDA	£2.02bn	£1.96bn	3.0%

Although BT’s top line is forecast to decline, the improvement in the bottom line is definitely a plus. If the telecom giant manages to exceed its estimates, I can see the share price rise. That being said, there are caveats to take into consideration. Changes in earnings outlook and dividend guidance may change the trajectory of stock prices.

Metric	FY23 (Consensus)	FY22	Projected growth
Group income	£20.53bn	£20.85bn	-1.5%
EBITDA	£7.91bn	£7.58bn	4.4%
Basic earnings per share (EPS)	17.6 p	12.9 p.m	36.4%
Dividends per share	7.74 p	7.70 p.m	0.5%

A buy signal?

Do I think BT shares should be bought before the Q3 trading update? Yes, there are always some tailwinds that make a positive case. Pair this with the low price tag and it’s sure to impress.

Metric	Multiples of value	Industry average
Price-to-Earnings (P/E) ratio.	7.5	17.2
Price-to-sales ratio (P/S).	0.6	1.2
Price-to-book (P/B) ratio.	0.9	1.7
Price-to-earnings growth (PEG) ratio	0.8	4.1

In addition, a history of high and substantial dividends should attract the interest of investors looking for passive income. After all, it has an impressive dividend cover of 2.6 times.

However, these catalysts do not necessarily reduce the range of problems facing the conglomerate, and the looming balance sheet is large. Price increases can be a good foundation. However, regulators review and can veto such increases to protect ISPs and customers. Please note that the new wholesale prices have not yet been approved by Ofgem.

Although most of the debt is short-lived, the repayments will certainly hamper future earnings and dividend expansion. This is evident in the latest analyst estimates, which predict a decline in EPS and dividends through FY25.

Consensus metrics	FY23	FY24	FY25
Group income	£20.53bn	£20.82bn	£21.01bn
EBITDA	£7.91bn	£8.05bn	£8.19bn
Basic earnings per share (EPS)	17.6 p	16.7 p.m	17.3 p.m
Dividends per share	7.74 p	7.79 p	7.63 p.m

So, if I’m investing for the long term, I don’t see BT shares as a good investment despite the short-term tailwind. So, I won’t buy the stock today.