British Telecom stock plunged this week on news the accounting issues at its Italian unit is much worse than expected, and will cost BT around 500 million pounds. BT also stated growth with be flat over the next 2 years.
500 million is not a big deal for BT – credit default swaps did not move much and they stated the dividend will not be lowered – so why has the stock sold off ?
2 reasons: Investors are questioning how this could happen at BT and the lack of growth over 2 years is a concern there is no real strategy in an environment where there is a lot activity in the sector – A&T buying Time Warner and Verizon buying internet assets.
2CentView is that the stock is now quite cheap. Accounting issues can happen at large or small companies, and as long as it is dealt with promptly and measures put in place, it should be fine.
Consensus earnings estimates have dropped from 450 to 400.
The 2CentView fair value has remained broadly unchanged at 400, as the dividends have not been affected and the valuation is more weighted to dividends than growth.
However, do not expect a quick return back to 350-375 area – it could take while, but while you wait you will get paid a dividend of 5%…..
If want to wait for the stock to recover, and happy to collect a 5% dividend while you do wait, recommend the following trade:
Buy here around 303, take profit target 375, stop 270, yield 5%.
Don’t see the stock dropping below 280 unless more bad news comes out of Italy – which is possible!
So It may be worth waiting a bit to see if more bad news comes out – if so wait and buy if stock goes above 315, [ increase take profit target to 390 and stop to 280].