Image source: BT Group plc
B.T. (LSE:BT.A) Shares don't make for a good investment at first glance, but initial appearances can be deceptive. In this case, however, I don't think they are; I'll stay pretty far away from this stock.
The most promising division of the company is Openreach. But while profits are growing in this part of the business, I'm skeptical that there's a long-term opportunity here.
What is the opposite of a growth stock?
BT's big problem is that it appears to be losing customers. It operates in three segments: Consumer, Business and Openreach, all of which appear to be moving backwards, according to its latest update.
In the six months to September 30, BT lost 49,000 consumer broadband connections, 113,000 business lines and 377,000 Openreach connections. That sounds bad and it is.
It must be recognized that the company has managed to do a good job to prevent this decline from being reflected in its financial performance. It has been raising prices to existing customers to make up for lost ones.
The problem is that I don't think I can do this forever and this presents shareholders with a big problem. However, the company has another strategy available. It is artificial intelligence.
<h2 class="wp-block-heading" id="h-ai-really”>ai, really?
As well as raising prices to limit falling revenues, BT is trying to reduce its costs. Last month, it announced another 2,000 job cuts, with more to come by 2030.
It is looking to replace some of these functions with artificial intelligence. While it's almost certainly not the most interesting use of ai, it could help the company maintain its dividend longer.
It might be a good idea, but I'm not particularly excited about it. Ultimately, it doesn't change the fact that the long-term outlook for the business appears to be one of decline.
However, at the right price, even a failing business can be a good investment. And a look beneath the surface reveals some potential value in BT shares.
Does Openreach have hidden value?
Since 2019, Openreach's operating profits have risen from £955m to £1.78bn. This is impressive for almost any business, especially one that has been losing customers all this time.
A company generating that much operating income (and still growing) is arguably worth £14.7bn alone. And that's BT's total market capitalization.
Investors might think Openreach is worth the current share price alone. Never mind the drops in the other divisions: they're essentially free anyway.
Unfortunately, those buying BT shares are not just paying the equivalent of £14.7bn. They are investing in a company with over £20bn in net debt and that makes the equation much less attractive.
not for me
Failing companies can sometimes have hidden value that management can unlock by selling units or buying back shares. But I don't see this with BT.
Analysts' average price target for the stock is around £1.90. But even with a 25% discount, there are several opportunities I prefer for my wallet.
