The FTSE 100 has risen about 20% over the last five years. However, some companies have done much better than others. In fact, more than a quarter have seen their shares rise 100% or more.
I’m currently looking at some of your favourite blue chips, and analysing their prospects for doubling your money in the next five years. Today, it’s the turn of Vodafone (LSE: VOD) (NASDAQ: VOD.US).
Ringing the changes
The past five years of numbers don’t give us much guidance on how the next five years will pan out for Vodafone. The group has just entered a stage of massive transformation, following the £84bn sale of its 45% stake in Verizon Wireless.
As a result of the sale, earnings per share (EPS) of 17.54p last year is forecast to drop to just 6.6p for the current year (ending March 2015). Vodafone needs to replace the lost earnings, and is following a strategy of hefty organic investment and targeted acquisitions.
There are always execution risks in a business overhaul on the scale being undertaken by Vodafone, and management certainly has its work cut out.
The next five years
Share price changes over any given period are driven by two things: growth (or decline) in earnings per share (EPS) and any change in the price-to-earnings (P/E) ratio.
At a share price of 186p and with forecast EPS of 6.6p, Vodafone is on a P/E of over 28 — double the long-term average of the FTSE 100. Vodafone’s sky high P/E reflects the current unusual circumstances, and I’d expect it to revert closer to the historical market average of 14 in time. BT Group, for example, is currently on a P/E of 12.
To double our money with Vodafone, we’d need to see the shares at 372p five years from now. If we assume the company is then on a P/E of 14, EPS would be about 26.6p.
That scenario would require EPS to increase at a five-year compound annual growth rate (CAGR) of 32%. That looks quite a tall order — and becomes even taller if the analysts’ are right in their forecast of an EPS rise to a mere 6.8p for the year ending March 2016. The CAGR thereafter would have to be 41% to hit the double-your-money target.
That looks a big ask to me, even though Vodafone does have firepower to push earnings up from their current low ebb. Therefore, I think you’ll struggle to double your money with Vodafone if buying shares at today’s price of 186p.
