BT(LSE: BT-A) (NYSE: BT.US) has been one of the FTSE 100s star performers over the past five years.
The companysshare price has risen nearly 270% since the beginning of 2010, outperforming the FTSE 100 by 241%. These gains have pushed BTs share price towithin a whisker of the key 500p level.
However, as the company branches out into new markets and competition intensifies, can BT make the final push and hit 500p?
Increasing competition
BT used to dominate the UK telecoms market but this is no longer the case. In fact, with almost every day that passes, BTs grip over the market slips. The companys peers, both small and large, are developing their own networks to rival BT around the UK.
These networks come in all shapes and sizes.Some peers are developing fibre broadband networks to bypass BT dominance over the consumer broadband network. Others smaller peers are edging in on BTs control over the business customer market. Then theres BT well-publicized battle with Sky for pay-tv customers.
And looking at the figures it becomes apparent that BT is rapidly losing business to these upstarts. For example, revenue has fallen at around 3.1% per annum over the past six years.
That being said, over the same period BTs net profit has doubled as the companys operating margin has increased. Although, it is unclear how much longer BT can continue to drive income growth through margin expansion.
Indeed, BT has relied upon its dominance over the fixed-line, broadband and pay-tv market to draw in customers over the past five years. This has helped the company drive income growth through higher margins services.
But now, may of BTs peers are starting to offer similar tri and quad-play media bundles, erasing BTs key competitive advantage.
Diversification
To try and regain its competitive advantage, BT is expanding in several new markets, one of which is the mobile market.
Through the acquisition ofEE Limited, the UKs largest mobile operator, BT will gain exposure to the mobile market. But once again, it remains to be seen if this push into mobile will work to BTs advantage.
Premium valuation
Overall, its not yet clear how increasing competition will affect BT. Nevertheless, at present levels the company is trading at a premium valuation, which looks to be too high based on the companys glacial projected growth rate.
According to current City forecasts BT is currently trading at a forward P/E of 14.5. Earnings per share growth of 5% is expected this year, which means that the company is trading at a PEG ratio of 3.2.
Further, if BTs shares were to hit 500p, the company would be trading at a forward P/E of 17. Unless the companys growth rate jumped to the double-digits, its unlikely that investors would want to pay this kind of premiumto get their hands on BTs shares.
On that basis, it seems unlikely that BTs shares will hit 500p.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
