The Vodafone (LSE:VOD) share price has taken quite a tumble over the last 12 months. The firm’s market-cap has shrunk by almost 25%, dragging its price-to-earnings (P/E) ratio to just 2.1!
Considering the market average is closer to 12, this FTSE 100 stock is looking exceptionally cheap. So on the back of today’s latest quarterly results, is this a bargain investors should capitalise on? Or is this actually a value trap to steer clear of? Let’s take a closer look.
Turning things around
Vodafone has been struggling to gain favour with investors for almost a decade. The group rapidly expanded its footprint and infrastructure, making it one of the largest telecommunications companies in Europe. However, this strategy came at a considerable cost that doesn’t appear to be paying off.
Last year, the board brought in Margherita Della Valle as the new CEO to try and get the business back on track, and restore growth as well as margins. So how is she doing?
On the growth front, things seem to be making progress. Vodafone’s B2B segment has expanded sales by 5%, which is up from 4.3% a quarter ago. Meanwhile, global services revenue is leading the charge at 8.8% growth – roughly in line with last quarter’s 9%.
However, a lot of investor focus continues to be on Germany since this is where the company does most of its business. And fortunately, sales in this region continue to move back in the right direction. Although it’s worth mentioning this growth was only a paltry 0.3% on an organic basis, which is actually down from 1.1% last quarter.
A closer inspection of Germany also reveals that higher sales are still being driven by price hikes rather than acquiring new customers. In fact, Vodafone continues to lose customers in this region, suggesting management still has some work to do to plug the leak.
What’s next for Vodafone?
Overall, the group’s total organic revenue growth came in at 4.7% which is a notable improvement versus the 1.8% achieved a year ago. However, as encouraging as this is, there’s still one glaring elephant in the room – debt.
Today’s trading update provided a detailed breakdown of its operations across the world. Unfortunately, there was little mention of the group’s balance sheet which, as of September 2023, was saddled with over €65bn (£55.5bn) of debt and equivalents. At today’s share price, that’s almost three times bigger than Vodafone’s entire market capitalisation!
The good news is that management has reiterated its previous guidance for underlying earnings. And it expects to generate an adjusted free cash flow of €3.3bn (£2.8bn) that will undoubtedly provide some financial flexibility to start reducing leverage.
All things considered, Vodafone’s low P/E ratio continues to make sense, in my eyes. Della Valle certainly seems to be making progress in restoring this enterprise. But after a decade of mismanagement, there’s still a lot of work to do. For now, I’m keeping Vodafone shares on my watchlist.
