How would you like to buy a world-leading company in a huge and growing industry for the price of a mature ex-growth sluggard? Vodafone might just be that bargain.
After having had a look at BT, with its super-low P/E of just 5, last week, it's time today to investigate that other behemoth of the telecoms scene, Vodafone (LSE: VOD). My first quick look at the company's full year accounts and forecasts showed expectations of growing earnings and dividends, and with a forecast P/E of under 9 and a dividend yield of over 6%, Vodafone is fulfilling some of the criteria that value investors look for. Such figures are usually associated with mature companies that are well past their growth phase, and which are paying out a large proportion of their earnings as dividends. But the mobile telecoms industry is far from mature and surely has many years of growth ahead of it.
Latest figures
How that mooted growth will pan out will depend a lot on the way the world's economies go over the next few years, but when its latest trading statement was announced, Vodafone's management sounded positive. It's important to remember that management statements always try to make things sound positive, but it seems clear that revenues are holding up. Group revenue grew 14%, though that was largely due to favourable exchange rate movements (and it's interesting to see that Vodafone's global presence has led to this, when so many other companies are being hurt by the falling value of the pound). But we must be cautious that without the exchange rate movements, Vodafone's organic revenue actually remained pretty flat.
How much debt?
Debt, debt, debt -- that's what we're hearing from all quarters these days, and while Vodafone is in little danger of having its funding pulled, it is very important that investors check it out. Net debt had increased during the quarter to December 2008, but that was mostly due to exchange rate fluctuations again, so while revenues are up, debt is up for the same reason, to approx £33b. And as exchange rates affect the swings as much as the roundabouts, free cash flow also rose for the same reasons.
What do these exchange rate movements say about Vodafone's vulnerability to currency markets? The currency mix of the company's debt remains broadly in line with its global mix of business, which, as Vodafone is not in the currency speculation market, seems like a prudent approach. Liquidity is in no danger in the short term, as the company has issued nearly £2.9b in bonds, has refinanced nearly the same amount again, and has undrawn credit facilities of £6.5b.
Job cuts
But costs clearly are a worry for Vodafone, and as part of its ongoing measures aimed at slimming operating costs by £1b a year, the company is cutting 500 staff positions in the UK. To keep that in proportion, Vodafone does currently employ 10,000 people in the UK, so that's not as drastic as the cuts some companies are being forced to make. But it is still a sign of the harder times that businesses are finding themselves.
Working with Microsoft
There are good things happening too, as Vodafone has recently announced a venture with Microsoft (Nasdaq: MSFT), in which Vodafone will offer a full service comprising handsets, voice and data communications and other necessary equipment, providing bundled access to Microsoft’s online services. Collaborative ventures like this will most likely provide a number of opportunities for future growth, and the major players will have significant advantages in procuring such deals with the likes of Microsoft.
Is it worth it?
While Vodafone is in a highly competitive sector, and clearly is going though a less-than-rosy patch, it remains a high-tech growth company at a very low valuation. That valuation might turn out to be rational, but I can't help feeling there'll be a lot of people looking back in five or ten years time wishing they'd bought some today.
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