Vodafone Group (LSE: VOD) has been a bit of a mystery to me, with the shares on a pretty high P/E rating despite several years of falling earnings — in fact, we’re looking at a trailing P/E of 44 for the year just ended in March, and even with two years of earnings recovery forecast, we’d still only see that drop to 29 in two years time.

And even that high valuation comes after Vodafone shares have recorded a very modest 23% gain in five years, while quad-play operator BT Group, which is firmly back into the mobile market, has put on 120% in the same period — and BT shares are on a P/E multiple of only 14. Vodafone’s dividend yield is higher at around 5% compared to 3.5% from BT, but it’s only about half covered by earnings.

We’ve had full-year results from Vodafone on Tuesday, so is there anything in there that justifies this high valuation?

Critical revenues

Service revenues are going to be critical for Vodafone’s future, and the group reported a 2.5% rise over the year, with the recent fall in European service revenues apparently stabilizing with a 0.5% gain. EBITDA recorded at £11.6bn came in 2.7% ahead of the previous year on an organic basis.

Earnings per share were still weak, with an adjusted figure of 5.04p representing a 9% fall, but analysts have a return to growth of 18% forecast for the current year, followed by a 29% gain the year after.

All this, however, is difficult to quantify meaningfully, as Vodafone has been shouldering a lot of capital expenditure in recent years as it has been investing in its 4G networks across Europe. But chief executive Vittorio Colao tells us that “We have now successfully concluded our Project Spring organic investment programme“, and in the year just ended Vodafone’s capital expenditure has fallen by 6.5% to £8.6bn — and in the future, Vodafone expects that to fall to “the mid-teens as a percentage of annual revenue“.

Takeover on the cards?

Then there are persistent hopes in some quarters of a takeover attempt for Vodafone, or at least a merger of some sort, so is it looking any riper for the picking now?

In some ways, it surely is, with the company’s massive investment having extended the reach of its 4G capabilities significantly. Vodafone now has 46.8 million 4G customers and its coverage has reached 87% in Europe, so it might seem attractive in advance of those 4G profits starting to ramp up.

But I don’t see Vodafone as a cheap target by any means, as a significant number of investors doggedly hanging on in the hope of a quick takeover profit have kept Vodafone shares high. On the other hand, firms looking to jump into the quad-play market might see Vodafone’s mobile network as a tasty ready-made addition to their existing offerings, and might be prepared to pay handsomely for it.

Fundamentally pricey

The bottom line for me is that buying in the hope of a takeover is a pretty risky way to invest, and it’s not something I’d ever do. And on fundamentals, I see much better telecoms investments out there right now than Vodafone.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.