When I looked at Vodafone in January the shares were 220p. The forward price-to-earnings (P/E) ratio for the year ending March 2017 was 38, the price-to-earnings growth (PEG) ratio was 2.1, and the dividend yield was 5.2%.
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I thought the P/E and PEG were unattractive, particularly given continuing economic fragility in Europe (by far Vodafone’s biggest market), and I was also concerned that the company seemed to be behind the curve on the market’s move towards converged services of fixed line, broadband, public Wifi, TV and mobile.
However, there’s been some encouraging news this year, both on Europe — a first quarter of positive revenue growth since December 2010 — and on converged services, with the company announcing deals in the Netherlands and New Zealand.
The share price is around the same level as in January, but earnings upgrades have brought the P/E down to 35 and the PEG to 1.4. This is still a bit rich for my liking, but coupled with a highly-attractive 5.2% dividend yield, I believe Vodafone’s shares could now be worth buying.
After a long string of profit warnings, Rolls-Royce’s shares were languishing at 565p early this year. I acknowledged the company’s strong order book and that new chief executive Warren East is a class act. But with a forward P/E of 19 and the dividend under threat, I felt a turnaround and the rebuilding of investor confidence could take some considerable time, and saw little reason to rush to invest.
The shares rallied strongly after the company’s results in February (reaching well over 700p in March), for although the dividend was slashed in half, the market was relieved there was no further profit warning.
The shares have since drifted lower, but at 595p are still 5% higher than January, while the forward P/E is now up to 24.5. The elevated valuation and the potential lengthy timescale of a turnaround keep me on the sidelines for the time being.
When I looked at stamps and collectibles group Stanley Gibbons, the shares were trading at a depressed price of 83p in the wake of a profit warning in October. On the basis of the company’s past form on this front, I said I wasn’t prepared to bet against there being a further profit warning during 2016/17.
My fears were quickly confirmed when trading proved to be so poor and debt so onerous that the company was forced into an emergency equity fundraising of £13m at 10p a share. At the same time, the chairman announced he was stepping down.
The shares of Stanley Gibbons are trading at 13.5p as I write — 84% down from January — and I’m not even going to look at valuation. This is a business I’ve never liked (it’s dependent on the “greater fool theory”) and it’s in a mess. As such, it stays on my ‘avoid’ list.