Do I still think the Vodafone share price could double your money?

G A Chester has been bullish on Vodafone and a small-cap tech firm, but after strong gains would he now buy, sell, or hold these stocks?

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In an article this time last year, I wrote bullishly about small-cap tech firm Tracsis (LSE: TRCS) and FTSE 100 telecoms giant Vodafone (LSE: VOD). The former’s shares were trading at 590p and the latter’s at 147p.

I’ve written about Vodafone a number of times since, suggesting in May, when the shares were trading at 124p, that investors could double their money. With the shares now at 162p, and Tracsis’s at 622.5p (up 3% today, following the release of its annual results), it seems like a good time to review.

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I’ll look at Tracsis first, before turning to my headline question: “Do I still think the Vodafone share price could double your money?”

Very buyable

Tracsis describes itself as “a leading provider of software, hardware, and services for the rail, traffic data, and wider transport industries.” One of the things I like about the business is that I see strong structural drivers for growth in the areas it specialises in, due to rapid urbanisation, rising demand for intelligent transport solutions, and enhanced safety.

It’s no surprise, then, that the company today reported a very healthy 24% increase in revenue to £49.2m for its financial year ended 31 July. This came from a combination of organic growth of 9% and growth from acquisitions of 15%.

Operating profit before exceptional items increased 13% to £6.7m, earnings per share (EPS) rose 7% to 28.25p, and the board lifted the massively covered dividend 13% to 1.8p. Impressively, Tracsis has no borrowings, and ended the period with a cash balance of £24.1m, up from £22.3m, despite spending £6.8m on three acquisitions during the year.

The table below puts the current valuation of the company in the context of the previous years when I covered its results:

 

Share price (p)

EPS (p)

P/E

Cash per share (p)

Cash-adjusted P/E

2019

622.5

28.25

22.0

84

19.1

2018

590

26.34

22.4

79

19.4

2017

522.5

24.08

21.7

55

19.4

I’ve said for the last two years the shares look very buyable to me, and I say it again this year, with the cash-adjusted price-to-earnings (P/E) ratio at 19.1.

Mixed news

Vodafone’s half-year results for the six months ended 30 September, released earlier this week, contained mixed news. The headline was a statutory loss of €1.9b. Management said this “primarily reflects losses in relation to Vodafone Idea post an adverse judgement against the industry by the Supreme Court in India.”

Whatever the outcome of the company’s active engagement with the government to “seek financial relief for Vodafone Idea” – and indeed it’s future in the country – I don’t think it’ll ultimately derail the prospects of what is an internationally diversified telecoms behemoth.

The positives in the results included organic revenue growth of 0.7% in Q2 (a strong rebound from a 0.2% decline in Q1), and an upgrading of management’s full-year guidance on earnings before interest, tax, depreciation, and amortisation (EBITDA). The company now anticipates EBITDA of €14.8b to €15.0b (previously €13.8b to €14.2b).

Plenty of upside

In contrast to Tracsis, Vodafone carries hefty net debt (€48.1b at the period end), and this year’s forecast EPS of 8.3p (giving a P/E of 19.5) only thinly covers an anticipated dividend of 7.8p (4.8% yield).

I don’t see investors doubling their money in short order from the current share price. However, with City analysts forecasting EPS growth in excess of 20% next financial year, I believe there’s still plenty of upside for the shares, and I’d be happy to buy them at today’s level.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tracsis. 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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