Image source: Vodafone Group plc
I’ve long been arguing that the Vodafone (LSE:VOD) share price underestimates the true value of the telecoms group. However, nobody appears to have been listening!
Well, maybe things are starting to change. That’s because since 4 February, when the share price closed at 65.1p, it’s risen 16.1% to 75.6p (at lunchtime on 21 March).
Although I’m a shareholder, I try to take a dispassionate view. There’s no point trying to kid myself if I know – deep down – that I made a mistake when I bought the stock. As Warren Buffett famously once said: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
But whatever metric I use, I always come back to the same conclusion. Namely, that Vodafone’s market cap (currently £19.2bn) doesn’t accurately reflect its underlying value.
Crunching the numbers
Take earnings as an example.
The average historic (trailing 12 months) price-to-earnings ratio of 206 listed telecoms companies is 12.6. For the 12 months to 30 September 2024, Vodafone’s basic earnings per share from continuing operations was 8.87 euro cents (7.43p at current exchange rates). If the group was valued in line with the sector average, its shares would currently be changing hands for 93.6p. That’s a premium of 23.8% to today’s price.
It’s a similar story when the group’s balance sheet is considered. Using its latest published accounts at 30 September 2024, Vodafone’s price-to-book (PTB) ratio is just 0.38. For comparison, its closest rival on the FTSE 100, BT, has a PTB ratio of 1.3.
Finally, I believe the most recent transaction by the company supports my argument.
In January, Vodafone sold its Italian division for 7.6 times adjusted earnings before interest, tax, depreciation and amortisation, after leases (EBITDAaL). Analysts are predicting EBITDAaL of €11.02bn (£9.24bn) for the year ending 31 March 2025. Valuing the group on the same basis would imply a stock market valuation of over £70bn. Reducing this by the group’s debt would still suggest its current market cap is way below its intrinsic value.
Problems to overcome
However, despite my belief that it’s undervalued, the group continues to face some challenges.
As a result of a law change concerning the bundling of contracts, it’s losing domestic customers in Germany, its largest market. And its debt remains on the high side — telecoms infrastructure doesn’t come cheap. Competition in the sector is also intense.
Sceptics might also point out that the company’s share buyback programme is behind the share price increase, rather than a change in investor sentiment. The company’s bought just over 406m of its own shares since the start of February, reducing the number in circulation by 1.6%. I’m sure this will have had some impact on the price but I don’t think it explains all of the recent increase.
Calm down!
Yet despite the recent share price rally, I’m not getting too excited. A look at the group’s five-year chart shows that we’ve been here before. Many times, in fact.
At least it’s been trending in the right direction for the past six weeks or so. I’m therefore going to hold on to my Vodafone shares, hoping that more investors will soon value the stock as I do.
