The Vodafone (LSE:VOD) The share price is currently (August 14) at around 74 pence. It was last above 80 pence in September 2023. Since August 2023, the share price has risen by a meager 2.5%.
The stock doesn’t seem to be moving.
However, I believe there are some indications that the company is significantly undervalued. However, I think it will take some time before enough investors are convinced to push the share price higher. Let me explain.
The proof
Deutsche Telekom is Europe’s most valuable telecommunications company. For the fiscal year ending on December 31, the consensus forecast of analysts is for earnings per share (EPS) of €1.81. With a current share price (August 14) of €24.85, the price-earnings ratio (P/E) is 13.7.
Vodafone is currently undergoing a restructuring phase. Excluding the parts the group is currently looking to sell, analysts expect earnings per share of 9.22 cents (7.89 pence) for the financial year ending 31 March 2025 (FY25). If this is correct, this corresponds to a P/E ratio of 9.4.
If Vodafone were to achieve the same valuation multiple as its German competitor, its share price would be 46 percent (108 pence) higher.
The situation is similar with the dividend. Deutsche Telekom’s forecast is to pay out 0.85 cents per share in 2024. This results in a current yield of 3.4 percent.
Vodafone is expected to pay its shareholders 4.50 euro cents (3.85 pence) in the 2025 financial year – a yield of 5.2%.
As the British company’s shareholders know only too well, dividends are never guaranteed. Vodafone halved its payout in 2019 and announced in May a further 50% cut for the 2025 financial year.
A company’s dividend is designed to compensate for the risk associated with holding its shares. If Vodafone shareholders were happy with a 3.4% yield, the share price would be 113p – an increase of 52% from current levels.
Investor sentiment
As a Vodafone shareholder, I am tempted to see this as unfair.
But that’s only part of the story. Deutsche Telekom recently reported its 26th consecutive quarter of EBITDAaL (earnings before interest, taxes, depreciation and amortization after lease) growth in the European Union. And in Germany, the company has increased its profits for 31 consecutive quarters.
During this time, Vodafone’s share price has fallen by around two-thirds. Vodafone’s consolidated revenue was lower in the 2024 financial year than in the 2022 financial year. And EBITDAal – adjusted for a smaller group – was 1.67 billion euros lower.
I am sure this explains the difference in the valuation of the two companies. One is growing while the other is undergoing a radical restructuring.
But by withdrawing from Spain and Italy, Vodafone is trying to get a handle on its huge debt and improve its return on capital, which lags behind that of some competitors.
Looking further into the future
And if Vodafone’s reorganisation proves successful and the company can return to growth, I see no reason why the share price should not rise by around 50 percent.
But that will take some time. The first quarter results for fiscal 2025 showed some signs of recovery. Revenue increased 3.2% year-on-year. And EBITDAaL was almost 2% higher.
But one swallow does not make a summer. It takes several quarters of increasing sales and profits until the company – I am convinced of this – is rated as positively by investors as, for example, Deutsche Telekom.
The post “This is why I think Vodafone’s share price undervalues the company by 50%!” appeared first on The Motley Fool UK.
Further reading
James Beard holds positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. The views expressed on companies mentioned in this article are those of the author and may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024
