Is Vodafone a Good Deal?

With shares of Vodafone Group Public Limited Company (NASDAQ:VOD) trading at around $29.60, is VOD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

This Catalyst section is shorter than most. The juicy material has been saved for the Trends and Conclusion sections.

Vodafone is an international mobile telecommunications company with over 400 million customers. The bullet points below offer a quick and easy overview of Vodafone’s current situation.

Positives:

  • Geographic diversification
  • In a win/win situation with 45 percent ownership of Verizon Wireless
  • Boosting investments in southern Africa (high growth rate)
  • Vodacom’s EPS increased 25 percent on annual basis (Vodafone owns 65 percent)
  • Always looking to grow through acquisitions on global scale
  • Quality debt management
  • 3.40 percent yield

Negatives:

  • Inconsistent revenue and earnings on annual basis
  • Weak margins
  • Significant exposure to Europe

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Vodafone, AT&T (NYSE:T), and Verizon Communications (NYSE:VZ). Vodafone has a market cap of $145.23 billion, AT&T has a market cap of $202.23 billion, and Verizon has a market cap of $147.51 billion.

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VOD

T

VZ

Trailing   P/E

N/A

29.46

129.00

Forward   P/E

11.67

13.59

16.29

Profit   Margin

-3.80%

5.70%

0.98%

ROE

-1.96%

7.60%

13.07%

Operating   Cash Flow

$18.69 Billion

 $39.18 Billion

 $33.06 Billion

Dividend   Yield

3.40%

4.70%

3.90%

Short   Position

N/A

1.50%

2.00%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Vodafone is stronger than the industry average of 0.50.

Debt-To-Equity

Cash

Long-Term Debt

VOD

0.50

$12.23 Billion

$57.09 Billion

T

0.75

$4.95 Billion

$169.48 Billion

VZ

0.60

$6.14 Billion

$52.88 Billion

 

T = Technicals Are Strong  

Vodafone has performed well over the past three years. That said, it has underperformed AT&T and Verizon for one-year and three-year time frames.

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1 Month

Year-To-Date

1 Year

3 Year

VOD

5.58%

17.49%

13.18%

55.10%

T

2.86%

12.60%

27.01%

66.64%

VZ

6.76%

22.36%

40.34%

122.80%

 

At $29.60, Vodafone is trading above all its averages.

50-Day   SMA

27.52

100-Day   SMA

26.80

200-Day   SMA

27.51

 

E = Earnings Have Been Inconsistent                  

Earnings have been heading in the wrong direction over the past two years. As far as revenue is concerned, there was a small blip in 2011, but 2012 showed a nice recovery, especially considering 2012 was a difficult year for many companies throughout the broader market in regards to revenue.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

17.79

28.79

29.50

28.66

29.08

Diluted   EPS ($)

0.63

0.41

1.09

0.94

0.86

 

 

N/A

N/A

N/A

N/A

N/A

Revenue   ($)in   millions

N/A

N/A

N/A

N/A

N/A

Diluted   EPS ($)

N/A

N/A

N/A

N/A

N/A

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Mobile might see slowing growth ahead, but in many parts of the world, it’s still in its infant stages. Vodafone is also in a strong position in regards to Verizon Wireless. However, this is a tricky situation. The risk of not selling that stake is a significant downturn in the global economy. Europe is already weak. In the United States, interest rates will eventually increase and monetary stimulus will have to slow. It would be hard to image these changes leading to a strong economic environment (this is why these policies don’t change). The reason the United States is being mentioned is because if it slows, it will drag the global economy down with it.

The point here is that while Vodafone is in a power position and it might seem wise for Vodafone to hold onto its Verizon Wireless position, if we see a deflationary environment in the future, then at least 90 percent of industries will see substantial declines. Wireless Communications would certainly be one of them. That being the case, if Vodafone doesn’t sell its stake in Verizon Wireless in the near future, then the value of Verizon Wireless may decrease, and Vodafone may have lost a golden opportunity.

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Conclusion

Vodafone has a lot of potential going forward, but it’s important to note that the stock lost approximately 40 percent in 2008. Therefore, the stock isn’t likely to be resilient in the event of a steep stock market decline. Is a steep stock market decline guaranteed? Absolutely not. However, the number one priority here is always capital preservation. Based on current market conditions, which include baby boomers retiring in droves (slows consumer spending), the eventual unwinding of monetary stimulus, the waning effect of monetary stimulus if there is no unwinding, Eurozone concerns that never improve, an enormous amount of government and private debt that must eventually come due, as well as unemployment and underemployment that has led to a weak consumer, this column will take a defensive tone for the foreseeable future. Only top-tier companies that offer potential even during the darkest of times will receive an OUTPERFORM rating. This approach might lead to missed opportunities, but missed opportunities are always better than losses.

Vodafone is a good company, but it doesn’t qualify as top-tier. The primary reason it earns a neutral rating is because of the enticing yield of 3.40 percent.

Vodafone is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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