The BT share price could rise another 25%, according to this broker

BT’s (LSE: BT.A) share price has climbed significantly recently. Year to date, it’s up about 33%. Is there potential for further gains? One major brokerage firm seems to think so – it has a price target that is considerably higher than today’s share price.

Potential for gains?

The broker I’m referring to is Morgan Stanley. It recently raised its price target for the FTSE 100 telecoms stock from 225p to 240p.

That new target is about 25% above the current share price. If it is acheived, a £2,000 investment today could grow to £2,500.

Morgan Stanley’s bullish thesis is based on BT’s current high level of investment in its fibre broadband rollout (which now covers around 18m premises). It believes that this should drive solid free cash flow growth once the project is completed and overall spending decreases.

However, not every broker is as bullish on BT as Morgan Stanley is. Currently, the average price target for the stock is 191p.

That’s very close to the share price today. In other words, on average, most brokers don’t see a lot of potential for share price gains right now.

Fully valued?

Personally, I don’t see a lot of potential for share price appreciation in the near term, either. Trading on a price-to-earnings (P/E) ratio of about 11 at present, BT looks fully valued to me.

Of course, that’s not a particularly high valuation. It’s actually well below the FTSE 100 average.

But I think it’s about right for BT, given its lack of revenue and earnings growth and large debt pile.

This financial year and next, revenue is not expected to increase materially. As for earnings per share, they’re expected to decline by about 5% this year.

Turning to the balance sheet, net debt stood at £19.8bn at the end of March. That’s quite a bit of leverage and it adds risk to the investment case.

Could AI boost BT?

It’s worth noting that, like a lot of companies, BT is planning to use artificial intelligence (AI) to boost efficiency and cut costs. Recently, CEO Allison Kirkby said that it could potentially cut more 40,000 jobs by the end of the decade, stripping out around £3bn in costs.

This is an issue worth monitoring closely. If it is able to cut costs dramatically, earnings could get a major boost and the stock could potentially command a higher valuation.

There’s no guarantee that it will be able to cut costs like this, though. With these kinds of capital-intensive companies, there is always the risk of project costs blowing out and overall costs coming in higher than expected.

Better shares to buy?

So, while Morgan Stanley sees potential in BT, it’s not a stock I’ll be buying in the near term. There is a decent dividend yield of 4.4% on offer today, but all things considered, I think there are better shares to buy for my portfolio right now.

The post The BT share price could rise another 25%, according to this broker appeared first on The Motley Fool UK.

Should you buy BT now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows…

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

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

Edward Sheldon has no positions in any 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.