Formerly known as British Telecom, BT Group (NYSE:BT) is the largest supplier of fixed-line phone services in Britain and provides internet services as well. It has roughly 20 million customers, both business and residential, and it also provides network services to other providers.
Why has BT thrived in the past? Well, for one, it used to be a government-owned monopoly, until the telecom industry was privatized in the early 90s. While BT now faces much stiffer competition for landlines, it still controls 60% of retail voice minutes and 40% of business voice minutes. It is aggressively pushing into what they call "new-wave" products, which account for 32% of sales and growing. It also is the largest supplier of high-speed Internet lines, including lines they wholesale out.
There is much I like about the way BT is running its ship. It is strategic in how it is playing good guy with the British telecom regulator, Ofcom, by now running its sizeable wholesale and retail sectors independently, allowing it to better manage and plan each group to the benefit of the whole. When it set up Openreach, its wholesale business, regulations were eased on things like high-speed Internet access. Openreach gets nearly half of its revenue from outside sources, and its separation from the retail sector has not affected the overall company adversely.
The UK has one of the most competitive markets for fixed line phones and internet access; BT is holding its own but will continue to face pressures from other companies. NTL, which is planning to merge with Virgin Wireless, and Cable & Wireless and Orange are all eating into BT’s customer base. BT has poured tons of resources into their service and support departments to try to staunch the loss of customers. It is also setting up a network project which will transform its telephone network from the present Public Switched Telephone Network [PSTN] to an Internet Protocol [IP] system with all customers by around 2008.
BT’s operating costs are dropping and margins are improving as the IP system rolls out. They also have a good cash flow and have won some key contracts of late, such as a 5 year, $567 million contract with Fiat. However, the regulators in Europe are making sounds that they may re-jig the European telecom regulations, which likely could hurt BT, and the new advances into which BT is pouring resources may have glitches.
Type of stock: With a market cap of over $40 billion, this giant British telecom company has strong growth of late but faces serious competition particularly as landline services are replaced by internet and wireless services.
Price target: Now at mid $48, it is trading near its 52 week high of $48.55. Its value has been tapped out. While I expect this to keep growing this year, unless this drops into the high $30s I don’t think it will warrant picking BT now.
BT 1-yr Chart