BT Group Plc (BT) is expected to report in-line 4Q08. It reported a weaker-than-expected 3Q08, with revenues below our estimate, but earnings, helped by a lower effective tax rate, were in line.
The company is moving ahead with the expansion of its 21CN network. The company rolled out its wholesale broadband services on the 21CN network recently. BT Global continues to execute well, winning deals valued at £8.6 billion in the trailing 12-month period. The company has been able to expand EBITDA margins due to its restructuring efforts, although pricing pressure is causing traditional revenues to decline.
Shares of BT are currently trading at 9.4x our 2009 earnings estimate of $4.69 after we have raised our currency expectations for the British pound against the US dollar to $2.025 per £1, compared to our previous $1.95 per £1 expectation. We believe BT should trade at 9.86x our fiscal 2009 earnings estimate, which gives us a target price of $46.25 over the next six months. We continue to rate shares of BT a Hold and continue to believe that BT will perform well in the US Markets, as the US dollar has remained weak against the British pound and euro and as most of its revenues come from Europe.
We have slightly reduced our revenue estimates for the remainder of 2008 and 2009 because of the revenue miss in the most recent quarter, while our earnings estimates are down for 2009 due to effects of restructuring expenses and also the weaker dollar. The cost-cutting measures, capital expenditures in new wave initiatives, the progress of launch of BT Vision and large deal wins give us confidence that the company is moving in the right direction. Furthermore, BT's relatively low level of debt compared to its assets size and pension fund surplus of £1 billion will enable the company to divert its cash flow towards share buybacks in 2008 and beyond.
Udayan Mukherjee contributed to this report.
Read the full analyst report on BT.
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