Image source: Vodafone Group plc
On 1 January 2023, the Vodafone (LSE:VOD) share price was 84.2p. That was the day Margherita Della Valle was promoted to chief executive of the telecoms giant.
As I write (late on 19 June), the company’s shares changed hands for 76p — 9.7% less. Over the same period, the FTSE 100’s risen 17.9%.
A new direction
This disappointing performance comes during a period of reorganisation. Soon after taking over, the company’s new boss presented a “roadmap” explaining that the group “must change”.
Della Valle’s rationale was that the declining share price – the group was once the most valuable on the Footsie – was due to the fact that despite investing more than other industries, the telecoms sector earns far less.
Of the group’s 12 divisions, four were generating less than the cost of funding their operations. Subsequently, this led to the disposal of its businesses in Spain and Italy. And the announcement of a merger of the group’s UK operations with peer Three is expected to be finalised soon.
Specifically to Vodafone, she pointed to a complex organisational structure, reduced commercial agility, insufficient customer focus and sub-optimal scale as particular problems.
A mixed performance
To measure progress, she identified service revenue, adjusted EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases), free cash flow and return on capital employed (ROCE) as key metrics.
But looking at these gives a strong clue as to why the group’s share price appears unable to break through the 80p barrier. Although service revenue’s higher, earnings and free cash flow (FCF) have fallen over the past three years. And the group’s FY25 ROCE was lower than in FY24, and only 0.2 percentage points better than during FY23.
| Measure | FY23 | FY24 | FY25 |
|---|---|---|---|
| Service revenue (€bn) | 30.3 | 29.9 | 30.8 |
| Adjusted EBITDAaL (€bn) | 12.4 | 11.0 | 10.9 |
| Adjusted FCF (€bn) | 4.1 | 2.6 | 2.5 |
| Post-tax ROCE (%) | 6.8 | 7.5 | 7.0 |
However, analysts are expecting modest growth in FY26. The consensus is for EBITDAaL of €11.1m and FCF of €2.6bn. They have an average 12-month price target of 85.5p, suggesting that the group’s shares are currently 12.5% undervalued. The most optimistic reckons they’re worth 128.2p.
But the company divides ‘expert’ opinion. Of the 19 brokers covering the stock, eight give it a Buy rating, another eight consider it to be a Hold and three are advising their clients to Sell.
My view
As a long-suffering shareholder, I plan to retain my shares. That’s because I agree with the analysts that the company’s undervalued. For example, it has a lower price-to-earnings ratio than many of its European peers. And although there are no guarantees, at the moment it offers a dividend yield comfortably above the FTSE 100 average.
However, I think the group needs to prove that its new strategy is working before investors climb aboard and push the share price higher. The business is struggling in Germany, its biggest market, due to a change in law over the bundling of TV contracts in blocks of flats.
And the reason for selling Spain and Italy, shrinking the group in the process, was to improve its efficiency. Yet, compared to FY24, its FY25 ROCE is going in the wrong direction. But Rome wasn’t built in a day. The group’s enormous and it’s going to take time for the recent changes to take effect.
On balance, I think Vodafone’s a stock that investors could consider. Having said that, I don’t think much is going to change over the next few months. It’s definitely one for the long term.
