Forget Mothercare! The Vodafone share price is rising

As Mothercare slides into administration I take a closer look at Vodafone’s recent price rise.

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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.

The Mothercare (LSE:MTC) share price fell over 30% yesterday as the company announced its collapse into administration, after failing to find a buyer for its 79 UK stores. As I write, the share price has risen over 16% today so what does this mean? Its international business remains profitable and the brands may continue to be sold through other channels.

Although the UK business will no longer exist, the shares are not being de-listed, as the worldwide company still exists and in its latest annual report to 30 March, international profits exceeded £28m. However the pension fund has a shortfall of £139m which the international arm of the business will have to absorb. 

Sentiment surrounding the store’s collapse on social media is not particularly complementary. Many consumers saw it coming and are not surprised. Some shoppers found it overpriced, with a lack of choice and slated it for not having basic mother/baby feeding and changing facilities in the store, concluding that they’re not shocked it ran itself into the ground.

However, some customers are outraged at blame being pointed to online competition, instead chalking it up to the rise in austerity, reduction in spending money, and government price hikes, stating that many baby clothes are in fact far more expensive to buy online.

Others feel Mothercare cannot be considered another casualty of Brexit. Back in 2014, Mothercare lost £28m, followed by £15m in 2015. Since Brexit, Mothercare went on to do much better with pre-tax profits of £6m in 2016 and £8m in 2017.

Whatever the reason, it’s a very sad day for all involved. Although some people are still jumping in to buy Mothercare shares at this discounted price, I think it could have further to fall and will avoid with a barge-pole. 

Considering the very depressing state of the British High Street and the UK retail sector in general, where is a good place for stock market beginners to invest their hard-earned cash?

Telecommunications

After enduring a period of being out of favour with investors, Vodafone (LSE:VOD) is making a comeback. The Vodafone share price has been steadily rising over these past few months as shareholder sentiment has turned positive. It acquired telecoms assets across Europe from Liberty Global in a deal worth €18.4b.

Shareholders see this as a strategic move by Vodafone, which has positioned itself as a major telecoms player in Europe, and Germany’s largest paid-for-television operator.

Vodafone offers a 4.8% dividend yield, which seems reasonable at first glance, but its important to be aware that this is after a cut earlier in the year.

Unfortunately, the group’s borrowings are closing in on $55b since the Liberty acquisition, with a current debt ratio of 46% and negative earnings per share.

It does intend to sell some assets to offset some of its debt, which includes the closure of 1,000 shops across Europe. This will not be a quick fix, but should help the company regain solid ground and return to growth in the future.

Now that moves have been made to streamline the business, I think investors are seeing that leveraging the strength of the Vodafone brand while de-risking the business will take Vodafone in a positive direction. Its average yearly price-to-earnings ratio is 16. I think it’s well positioned for a steady climb and consider it 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 considered so you should consider taking independent financial advice.

Kirsteen 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.

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