Has BT’s share price gone too far?

This BT (LSE:BT.A) has been on a roll lately. The stock has taken a few months to get going this year. But after a surge in May, it hasn’t slowed down. In May, the company released full-year results that clearly got investors excited. The stock is up almost 15% since the announcement.

The stock is up 18.4% year to date, and up 37.2% in the last six months. FTSE100During the same period, it increased by 4.3%.

But while the growth in recent months has been impressive, the question is whether the stock has peaked or is it simply too good to pass up? Without further ado, let’s dive in.

Quotation

So the business clearly has momentum on its side. But do the shares still have any value? I can answer that question with a few metrics. The first is the key price-to-earnings (P/E) ratio. BT is currently trading at a P/E of 17.3.

Compared to the FTSE 100 average of 11, this may look overvalued. That said, BT is cheaper than major rivals such as Vodafone (21.4) and German Telecom (25.9).

What’s more, the P/E ratio is just 5.7. This seems like a good value for a company of BT’s stature.

Broker Forecasts

This low valuation could be why analysts are predicting the stock will rise in the coming year. The 15 analysts offering a 12-month price target have an average of 200.1p. This represents a 35.1% premium to BT’s current price. Of these, the highest is 290p, which is 95.8% higher than the current share price.

Big dividend

Of course, analysts’ forecasts can be wrong. But I think they can be a good guide. What’s more, in addition to the experts being optimistic, the stock also has a 5.4% dividend yield.

Its payout is comfortably covered by profits. And while its yield has fallen in the past few months due to the share price rally, it is still comfortably above the 3.6% FTSE 100.

The burden of debt

But while that’s all well and good, I see a few serious problems with BT. The first is its large debt.

The company’s net debt now stands at around £20.6bn. That’s a monumental sum and almost 1.5 times BT’s market capitalisation. What’s more, with the UK base rate at 5%, high interest rates will only increase the cost of running it.

On top of that, my concern is the competition. Yes, the company is in the process of implementing its long-term plan. But it is alarming that BT is losing customers, especially to smaller, more agile competitors. It is a trend I will be watching closely in the coming months.

I keep my distance

While BT’s valuation is attractive, I see a number of problems with the company, namely high debt and increasing competition.

That’s why I’m avoiding adding any stocks to my portfolio. Despite its impressive growth, I’ll keep it on my watchlist for now.