For many years, I thought the BT (LSE: BT.A) share price should be avoided. There were many reasons why I believed the company wouldn’t be a great portfolio addition.
The biggest of these was its sizable debt pile, which threatened the organisation’s long-term growth potential. The group’s paying out hundreds of millions of pounds every year in interest on its debt. That’s money not being spent on growing the business.
However, over the past two years, the group has undergone a significant change. It’s really focused efforts on growth and has been working to improve customer service and efficiency.
Following this shift in strategy, I changed my opinion of BT. Initial results suggest the strategy’s working and, last year, the BT share price responded positively. It nearly doubled between October 2020 and June of this year.
Unfortunately, shares in the telecommunications giant have recently fallen back. So I think this could be an opportunity.
BT share price opportunity
I decided it was time to buy shares in BT around the middle of last year. I thought the company’s valuation was too cheap, considering its expansive footprint and restructuring potential.
This turned out to be the right call. As highlighted above, the stock doubled between the end of last year and the beginning of 2021.
Despite the recent performance of the BT share price, I’m still a buyer. It’s difficult to explain why the stock’s performed so poorly since the end of June when it topped out at just over 200p. Since then, the shares have been in retreat.
Granted, BT’s trading update for the three months to the end of June wasn’t particularly inspiring. Revenues declined 3% and pre-tax profit fell 4%.
However, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 3%. This can be a better way to evaluate business performance as it ignores the high depreciation costs, which are generally a factor of asset-heavy businesses.
Spooking markets
While EBITDA rose, net debt and capital spending also increased, which seems to have spooked markets. I’m not too concerned about these factors at this stage.
BT is spending massive amounts to build out its fibre broadband network, which is certainly required. This should yield results over the next few years, which should allow management to start reducing debt.
With this being the case, I’d use the recent declines of the BT share price to add the stock to my portfolio as an attractive valuation. I think investors are concentrating too much on short-term headwinds rather than the company’s long-term outlook.
Still, I’ll be keeping a close eye on the company as we advance because it has lost its way in the past. Factors such as increasing competition and higher interest rates could make life harder for management. Therefore, I can’t take its growth for granted.
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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.
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