When I think of mobile phone and communication specialist Vodafone Group (LSE: VOD) (NASDAQ: VOD. US), two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.
1) Over valuation
When Vodafone recently shed its stake in Verizon Wireless, marking an end to the firm’s participation in the big-earning US operation, the investment picture fogged.
Verizon used to contribute more than 40% of Vodafone’s operating profit but not any more. With May’s release of Vodafone’s full-year results, we get a peek at the cash flow statement and balance sheet to get an idea of the benefit to Vodafone and its shareholders since the Verizon deal closed during February.
The cash-flow statement shows a cash inflow of almost £35 billion from asset disposals, and Vodafone has paid down debt and bought back some of its own shares with most of the money. Before the deal, net tangible gearing ran at 114% and is now down to 76%. Meanwhile, net asset value per share, excluding intangible assets, has risen from 57.63p before the deal to 94.9p now.
Nevertheless, with the share price sitting at 199p Vodafone is no asset play, so forward earnings matter if we are to justify the current valuation. The forward P/E multiple is sitting at about 27 for year to March 2016. Forecasters expect earnings to grow just 2% that year, so the valuation looks high.
2) Lack of growth
Before Vodafone announced the Verizon deal in the Autumn of 2012, the firm’s share price sat at about 185p. After flogging the Verizon assets and returning about 65% of the proceeds directly to shareholders in the form of Verizon shares and cash, Vodafone’s share price is higher today than immediately before the deal, and that in the face of earnings capacity reduced by around 40%, give or take a bit for other acquisitions.
It seems that investor excitement before the Verizon deal and speculation that rump-vodafone might become a bid target after the deal have kept the share price elevated. Despite Vodafone beefing up its capital investment plans to the tune of around £6 billion over three years with its Project Spring, it’s hard to justify the company’s current P/E rating on projected earnings’ growth figures: a 60% drop for year to March 2015 followed by a rise of 2% the year after. A lot of the decline is down to the loss of Verizon, but not all of it; the firm faces tough trading in Europe although emerging markets still looking promising.
What now?
Vodafone offers a vulnerable-looking 5.9% forward dividend yield that city analysts don’t expect projected earnings to cover. Investors assume a lot of forward progress on earnings at this price and, to me, the path of least resistance for the share price seems to be down.
