Vodafone Group plc isn’t the only stock delivering a massive earnings turnaround

G A Chester discusses rapidly rising earnings at Vodafone Group plc (LON:VOD) and an under-the-radar small-cap stock.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Vodafone (LSE: VOD) today announced a fibre network share agreement in Portugal as it continues its strategy of expanding its fixed infrastructure via a mix of build, strategic partnerships, wholesale and buy approaches. This is part of a bigger picture in which it’s widening its capabilities and offerings by various approaches in different countries. Today’s deal takes its ability to market high-speed services across Europe from 98m homes to over 100m.

Major transition

The FTSE 100 giant has been undergoing a major transition since the £84bn sale of its 45% stake in Verizon Wireless in 2014. Its £6.5bn acquisition of Kabel Deutschland and £6bn acquisition of Spain’s Ono, either side of the sale, and a massive £20bn investment project across the group have been major components in a platform to rebuild the earnings from Verizon that it exchanged for £84bn.

The shares have traded in a range around 200p to 220p for much of the last few years, spiking up to 240p+ a few times in the months after the Verizon sale when it looked like Vodafone might be ripe for receiving a bid or engaging in a merger. However, as speculation receded, the shares have settled into the narrower range. Through this period the price-to-earnings (P/E) ratio has been above 30 (nearer 40 at times), with the market evidently confident that earnings growth would come through in due course and seeing an annual dividend yield in excess of 5% as fair compensation while waiting.

Earnings turnaround

Strong earnings growth is now starting to come through, with the company reporting a 17% increase in underlying earnings per share (EPS) for its financial year ended 31 March 2017. The City consensus is for annual EPS growth of around 12% for the foreseeable future. With rising EPS now rushing over the horizon but with the share price still in the 200p to 220p range (currently 209p), the P/E is rapidly falling. It’s 26 for the company’s current financial year, down to 24 for fiscal 2019. Meanwhile, the dividend, which is now supported by rising free cash flow, offers a yield of over 6%.

As Vodafone begins to ‘grow into’ its P/E there will come a point when the shares begin to rise. That may be a while yet but with the annual yield now over that 6% figure, the shares look very buyable to me today for investors with a little patience.

Record results time and again

Renew Holdings (LSE: RNWH) has seen a massive turnaround in earnings since its nadir in the 2008/9 recession. The provider of engineering services in regulated UK infrastructure markets has posted record result after record result in recent years.

It said in a brief update today that it expects to report figures for its financial year ended 30 September “in line with market expectations, delivering an increase in operating margin alongside growth in both revenue and operating profit. The board also expects to report that the group has moved to a net cash position.”

Its shares are trading up 4p at 414p, valuing this AIM-listed company at near to £260m. With City expectations of a 17% rise in EPS to 30p, the P/E is a reasonable 13.8 and the price-to-earnings growth (PEG) ratio of 0.8 is nicely on the value side of the PEG fair-value marker of one. As such, I rate the stock a ‘buy’.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Could Raspberry Pi shares hit £5 by 2030?

After a strong start out of the blocks this month, our writer asks whether Raspberry Pi shares could move further…

Read more »

Close-up of British bank notes
Investing Articles

Five 5%+ yielders I’d buy for an ISA today!

Our writer identifies a handful of FTSE 100 and FTSE 250 firms each yielding at least 5% he'd happily buy…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

5 stocks with 5%+ yields I’d love to buy and hold in a Stocks and Shares ISA

Harvey Jones is keen to add these five FTSE 100 high-yielders to his Stocks and Shares ISA, ideally before they…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d target £880 of passive income annually, spending £10K now on this FTSE 100 share

Our writer explains how he would add to his diversified portfolio happily by investing in this FTSE 100 passive income…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

3 reasons I think the Scottish Mortgage share price could keep rising

Christopher Ruane explains a trio of reasons he thinks the once-mighty Scottish Mortgage share price could be set to increase…

Read more »

Syringe and vial on blue background
Investing Articles

Is this forgotten FTSE share about to make investors rich all over again?

Not long ago, this FTSE share was all the rage before demand dropped off and things went south. Is it…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d use these 5 Warren Buffett approaches to build wealth

Christopher Ruane outlines a handful of investing lessons from billionaire Warren Buffett that he thinks can help a small investor…

Read more »

US Stock

Nvidia stock: 3 things investors need to know as it surges towards $150

Nvidia is a stock that's had an extraordinary run in 2024. Edward Sheldon highlights some important things investors should know.

Read more »