BT (LSE:BT.A) shares don’t like a good investment at first sight, but initial appearances can be misleading. In this case, however, I don’t think they are – I’m staying well away from this stock.
The company’s most promising division is Openreach. But while profits are growing in this part of the business, I’m sceptical of the idea that there’s a long-term opportunity here.
What’s the opposite of a growth stock?
BT’s big problem is that it seems to be losing customers. It operates in three segments – Consumer, Business, and Openreach – all of which seem to be going backwards, according to its latest update.
In the six months leading up to 30 September, BT lost 49,000 consumer broadband connections, 113,000 business lines, and 377,000 Openreach connections. That sounds bad and it is.
To the company’s credit, it has managed to do a good job of preventing this decline from showing up in its financial performance. It’s been increasing prices to existing customers to make up for lost ones.
The trouble is, I don’t think it can do this forever and this presents shareholders with a huge problem. Yet the company has another strategy available. It’s artificial intelligence.
AI — really?
In addition to increasing prices to limit revenue declines, BT is attempting to bring down its costs. Last month, it announced another 2,000 job cuts, with more to come by 2030.
It’s looking to replace some of these roles with artificial intelligence. While it’s almost certainly not the most exciting use of AI, it could help the company maintain its dividend for longer.
This might be a good idea, but it doesn’t particularly fill me with enthusiasm. Ultimately, it doesn’t change the fact that the long-term outlook for the business appears to be one of decline.
At the right price though, even a declining business can be a good investment. And a look beneath the surface reveals some potential value in BT shares.
Is Openreach hidden value?
Since 2019, operating profits at Openreach have gone from £955m to £1.78bn. That’s impressive for almost any business – especially one that has been losing customers over all that time.
Arguably, a business generating that much in operating income – and growing – is worth £14.7bn by itself. And that’s BT’s entire market cap.
Investors might think that Openreach is worth the current share price by itself. Never mind the declines in the other divisions – they’re essentially free anyway.
Unfortunately, those buying BT shares aren’t just paying the equivalent of £14.7bn. They’re investing in a company with over £20bn in net debt and that makes the equation much less attractive.
Not for me
Declining businesses can sometimes have hidden value that management can unlock by divesting units or buying back shares. But I don’t see this with BT.
The average analyst price target for the stock is around £1.90. But even at a 25% discount to that, there are several opportunities I prefer for my portfolio.
The post Why I’ll be avoiding BT shares like the plague in 2025 appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
BT share price to double in 2025!? Here are the most up-to-date forecasts
£5,000 invested in BT shares in 2023 would have made this much by now
Anywhere below £4, BT’s share price looks undervalued to me
21% potential gains? Here’s the 2025 forecast for the BT share price
2 FTSE 100 shares I won’t touch with a bargepole in 2025
Stephen Wright 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.
