Vodafone (LSE: VOD) (NASDAQ: VOD.US) and BT Group (LSE: BT-A) (NYSE: BT.US) don’t strike me as being attractive equity investments at this point in time. The latter may surprise investors in the next few quarters, however.
BT Group: Bulls vs Bears
BT is not an easy call. The business is in turnaround mode and the shares — at around 370p, where they currently trade — offer plenty of upside if management continues to deliver, the bulls argue.
In 2013, BT registered its first revenue growth in five years. Management is on track to meet targets for 2014. On the one hand, growth remains a big issue, and BT needs more than a mild rise in sales to impress investors. On the other hand, steady demand for fibre broadband and growing interest for BT’s sports TV offering are encouraging.
Investors are concerned with the cost of doing business in a segment where BSkyB is the market leader, but BT’s strategy is sound, the bulls insist. As BT’s market penetration rises, BSkyB shareholders will fell the pinch.
Those in the bear camp have more than one reason to doubt that returns will justify heavy investment in such a competitive field. I think they are wrong. They’d also point out that BT is not a truly defensive play, given that its shares may struggle in a more volatile trading environment. I think they are right. Furthermore, a sizeable pension deficit may force BT to deploy a pile of cash to service its pension scheme.
The bulls may argue that BT is financially sound, and it could get better, particularly if it continues to improve its cash flow profile. Its net debt position has markedly improved over the years. Moreover, BT is a yield play: it plans “to increase the dividend by 10%-15% for each of the next two years”. If the board does a good job in managing expectations, the total return generated by BT shares could easily beat that of the market to the end of 2015.
No Value In Vodafone?
I have voiced concern about Vodafone’s strategy for some time now. I think the British behemoth will continue to bid up for assets that aren’t worth their take-out multiples, just as it has done in previous acquisitions.
Another obvious problem is that Vodafone is too small to undertake a transformational deal — and it is also too big to go for a deal aimed at exploiting revenue and cost synergies.
In its current form, Vodafone is hard to value, but downside risk is apparent. Its stock trades at 193p, which means it has lost 34.6% of value in 2014. It’s also down 20% in the last 12 months of trading. Forecasts for growth in sales, operating income and net income suggest the business will need something truly radical to turn its fortunes around — something similar to BT’s strategy in the last couple of years.
