Is the Vodafone share price on the turn?

I’ve lengthy been arguing that the Vodafone (LSE:VOD) share price underestimates the true worth of the telecoms group. Nonetheless, no one seems to have been listening!

Effectively, perhaps issues are beginning to change. That’s as a result of since 4 February, when the share price closed at 65.1p, it’s risen 16.1% to 75.6p (at lunchtime on 21 March).

Though I’m a shareholder, I attempt to take a dispassionate view. There’s no level attempting to child myself if I do know – deep down – that I made a mistake after I purchased the inventory. As Warren Buffett famously as soon as mentioned: “Ought to you end up in a chronically leaking boat, power dedicated to altering vessels is prone to be extra productive than power dedicated to patching leaks.”

However no matter metric I take advantage of, I at all times come again to the identical conclusion. Particularly, that Vodafone’s market cap (presently £19.2bn) doesn’t precisely replicate its underlying worth.

Crunching the numbers

Take earnings for example.

The common historic (trailing 12 months) price-to-earnings ratio of 206 listed telecoms firms is 12.6. For the 12 months to 30 September 2024, Vodafone’s primary earnings per share from persevering with operations was 8.87 euro cents (7.43p at present trade charges). If the group was valued in keeping with the sector common, its shares would presently be altering palms for 93.6p. That’s a premium of 23.8% to at this time’s price.

It’s an analogous story when the group’s steadiness sheet is taken into account. Utilizing its newest printed accounts at 30 September 2024, Vodafone’s price-to-book (PTB) ratio is simply 0.38. For comparability, its closest rival on the FTSE 100, BT, has a PTB ratio of 1.3.

Lastly, I imagine the most up-to-date transaction by the firm helps my argument.

In January, Vodafone offered its Italian division for 7.6 occasions adjusted earnings earlier than curiosity, tax, depreciation and amortisation, after leases (EBITDAaL). Analysts are predicting EBITDAaL of €11.02bn (£9.24bn) for the yr ending 31 March 2025. Valuing the group on the identical foundation would suggest a inventory market valuation of over £70bn. Lowering this by the group’s debt would nonetheless counsel its present market cap is approach beneath its intrinsic worth.

Issues to beat

Nonetheless, regardless of my perception that it’s undervalued, the group continues to face some challenges.

On account of a legislation change regarding the bundling of contracts, it’s dropping home clients in Germany, its largest market. And its debt stays on the excessive facet — telecoms infrastructure doesn’t come low-cost. Competitors in the sector can be intense.

Sceptics may also level out that the firm’s share buyback programme is behind the share price improve, relatively than a change in investor sentiment. The corporate’s purchased simply over 406m of its personal shares since the begin of February, lowering the quantity in circulation by 1.6%. I’m certain this may have had some influence on the price however I don’t suppose it explains all of the current improve.

Settle down!

But regardless of the current share price rally, I’m not getting too excited. A take a look at the group’s five-year chart exhibits that we’ve been right here earlier than. Many occasions, in truth.

At the very least it’s been trending in the proper route for the previous six weeks or so. I’m subsequently going to carry on to my Vodafone shares, hoping that extra buyers will quickly worth the inventory as I do.