Do BT (LON:BT.A) shares offer an interesting value proposition?

FTSE 100 listed communication services giant BT (LON:BT.A) has been the subject of an accounting scandal, continued regulatory pressures and management changes in recent years, which has inevitably taken its toll on the company's share price. The shares are currently trading at £2.29 a share, well below the high of £4.99 reached in November 2015, but does this mean the shares are cheap?

Stacks of academic research covering different time frames and regions of the world all come to the same conclusion: over time and on average, cheap stocks outperform expensive stocks.

This sounds so glaringly simple and obvious. So, how come we're not all rich?

The fact is cheap shares are often cheap for a reason. They can look unappetising. And, while the evidence shows that maintaining a value strategy through boom and bust will be rewarded, sticking with it is actually extraordinarily hard. Yet the evidence is so compelling that value is one of Stockopedia's three main factors in investment returns.

One of the masters of value (and factor) investing is Jim O'Shaughnessy, the founder of O’Shaughnessy Asset Management (OSAM). In the 4th edition of his groundbreaking investment research tome What Works on Wall St, O’Shaughnessy showed that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.

It was from this robust insight that Stockopedia’s Value Rank was born, its synergy coming from the following simple valuation ratios:

• Price to Book Value
• Price to Earnings
• Price to Free Cash Flow
• Dividend Yield %
• Price to Sales
• Earnings Yield %

The Value Rank: how does BT stack up?

We can see by using BT’s StockReport that the group has a:

• Rolling price to book value of 2.09 vs an industry median of 2.00
• Rolling price to earnings ratio of 8.90 vs an industry median of 16.6 
• Rolling dividend yield of 6.58% vs an industry median of 5.07%
• Trailing twelve-month price to sales ratio of 0.97 vs an industry median of 1.20

From the above ratios, we can see that BT does enjoy a cheaper valuation when compared to its industry peers, which could suggest that the current shares are attractively priced. Indeed, when we compute all of these metrics together, we find that BT possesses a commendable Value Rank of 81. 

Investing in value stocks requires finesse and a sturdy constitution but, when cheap stocks come good, the payoff can be large and sudden.

BT’s Value Rank of 81 puts it in the cheapest quartile of the stock market. That is certainly a promising jump off point for our analysis but it is not the whole story.

A smarter way to invest in value stocks is to find the best quality value stocks or value stocks whose share prices are turning around - history shows that you can do much better than a passive investor by combining factors, so it makes sense to consider BT’s Value Rank alongside its Momentum and Quality Ranks.

Next Steps...

What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with BT that you can find out about here.