Is Now The Time To Invest In Vodafone Group plc, Inmarsat plc And Gamma Communications plc?

Stock market turmoil could have uncovered value in Vodafone Group plc (LON: VOD), Inmarsat plc (LON: ISAT) and Gamma Communications plc (LON: GAMA)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Maybe recent stock market weakness has exposed better value in the communications sector. Today I’m looking at Vodafone Group (LSE: VOD), Inmarsat (LSE: ISAT) and Gamma Communications (LSE: GAMA).

Where are the emperor’s clothes?

Vodafone paid for last year’s dividend by taking on more debt. The firm has good cash flow, but invests most of it to try to stay ahead of the game. Mobile communications is a competitive business, and the firm’s growth depends on throwing money at infrastructure and new initiatives to keep up with technological advances and changing customer expectations.

Last year, Vodafone declared its free cash flow to be £1.1 billion. The dividend payout that year, though, came to just over £2.9 billion. Despite all the cash the firm generated through operations, the dividend and capital expenditure to grow the business led to an £8.5 billion shortfall financed by debt. Net borrowings ended the year at £22.3 billion — around 11 times that year’s operating profit. Free cash flow was a chunkier £4.4 billion the year before, and the directors expect capital-intensity to reduce going forward, but the figures show how the firm is ploughing funds back into the business. Those holding the shares now must hope that investment will pay off with bigger earnings later.

The shares are down 19% from highs achieved in the Spring. They need to be, and not just because it’s clear that Liberty Global won’t be bidding for the company. Vodafone’s valuation seems too high. I don’t feel it should be necessary to look so hard for justification of the current share price. The forward price-to-earnings ratio (PER) runs at just over 33 for year to March 2017, yet City analysts expect earnings to grow just 19%, and those earnings will fail to cover the dividend payment by around 50%, making the 5.7% yield seem like an empty box, a box that free cash flow could find hard to fill. There’s a lot of expectation for growth built-in here, so I’m avoiding, in case it doesn’t work out.

A well-defended trading niche

It’s not easy, or cheap, for a competitor to launch a satellite so that it can compete with the services provided by Inmarsat. There are high barriers to entry into the sector and Inmarsat enjoys a well-defended trading niche.

The firm started in 1979 to enable ships to stay in constant touch with shore, or to call for help in an emergency, no matter how far out to sea. Today, the company serves many sectors – typically, businesses and organisations that need to communicate where terrestrial telecom networks prove unreliable or unavailable.

Inmarsat’s tasty economics drive a high valuation, perhaps justified by the defensive, cash-generating nature of the business. Recent market turmoil hardly touched the shares, and the firm’s forward PER runs at 28 for 2016, with City analysts expecting a 21% uplift in earnings that year. There’s a 3.6% forward dividend yield on offer with the payout covered once by expected earnings. Inmarsat’s defensive credentials appeal to me, and I’m far more likely to take a chance on the firm’s shares than I am with Vodafone’s.

One to watch?

With its market capitalisation of £294 million, AIM company Gamma Communications is the smallest company featured. The firm is a technology-based provider of communications services to the UK business market. Gamma aims to meet the increasingly complex voice, data and mobility requirements of businesses. The firm’s offering includes cloud PBX, inbound call control services, SIP trunking, business-grade broadband, ethernet, mobile and data services.

More than 80% of Gamma’s revenues arrive via a network of around 780 channel partners. The remaining revenue comes via direct sales into specific market sectors. Organic growth since 2006 has been driven partly by repeat revenues, the firm reckons.

The shares are tearing upwards. The forward PER sits at just under 19, and there’s a forward dividend yield running at 2% or so, with the payout covered more than twice by expected future earnings. This is one to watch, I think, and could be attractive if the shares pull back from the current 358p.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 Warren Buffett stock I’m buying now

Coca-Cola is the fourth-largest holding in Warren Buffett’s Berkshire Hathaway. I’ll explain why I’m following Buffett and buying more.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I bought 4,403 Lloyds shares in June and 4,856 in September. Here’s what they’re worth now

Harvey Jones thought he was bagging a FTSE 100 bargain when he bought Lloyds shares on two occasions last year.…

Read more »

Young woman holding up three fingers
Investing Articles

I’m itching to buy these 3 hidden FTSE gems in a Stocks and Shares ISA

Harvey Jones is keen to add these three FTSE 100 companies to his Stocks and Shares ISA before April. Only…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

How I’d try and turn just £1 a day into a fabulous £54,485 passive income for life

By investing small, regular sums in FTSE 100 shares I can potentially generate a huge passive income stream. It won't…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying under a dozen shares

Christopher Ruane explains why less could be more when it comes to building a share portfolio if he wants to…

Read more »

Investing Articles

Rolls-Royce shares are up over 1,000% since 2020! Am I too late to buy?

Rolls-Royce shares now cost over tenfold what they did in the firm's 2020 rights issue. Our writer thinks they may…

Read more »

Investing Articles

1 top UK growth stock for my tech portfolio in 2024

Up 30% in just one year, this growth stock looks positioned to continue on the path of substantial gains, according…

Read more »

Buffett at the BRK AGM
Investing Articles

I’d follow Warren Buffett to target effortless passive income

Warren Buffett knows a thing or two about building passive income streams. By learning from the Sage of Omaha, so…

Read more »