Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a turnaround or one to avoid?

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The Vodafone (LSE: VOD) share price has been on a downward trajectory for some time.

Over a 12-month period, the shares are down 34% from 102p at this time last year, to current levels of 67p. Going back further, they’re down 51%, from 141p at this time five years ago to current levels.

Let’s take a closer look at whether there’s a buying opportunity here, or if it’s one to avoid.

The problems

Firstly, the business seems to be recording consistent declining revenues and performance seems to be struggling in key areas. This includes all its core market segments which are the UK, Italy, Spain, and emerging territories such as Africa.

Next, part of this is linked to continued volatility and the industry in which it operates. For example, telecommunications requires hefty investment into infrastructure amid a backdrop of ever-growing and intense competition. This outlay isn’t helping its balance sheet and investor sentiment. It’s worth mentioning this is an industry-wide issue, not just something for Vodafone to contend with.

Moving on, the business has a lot of debt to pay down which isn’t ideal when performance is declining. Plus, competition is intensifying, and investment is needed to stimulate growth.

Finally, Vodafone’s return on capital employed (ROCE) has been pretty low for some time now. This is the measure of how efficiently a business uses its resources and assets.

Possible solutions

The business looks to be potentially exiting Spain and Italy. This could be pivotal to the firm recouping some money, and paying down debts.

Its latest debt figures stood at €36.2bn. Figures for the sale of these segments are mooted around €15bn. Let’s say Vodafone decided to use all of the money to pay down its sky-high debt levels. The business would put its balance sheet in a much better position, improving investor sentiment.

Yes, the business overall would be smaller, but the two markets mentioned have been costing it more than they have earned in recent years. So perhaps now is the right time to focus on territories where it can make more progress.

So with a smaller, more agile firm, less debt on the books, and using its resources more efficiently, I can see the Vodafone share price climbing.

My verdict

On the surface of things, an inflated dividend yield of 11.5% and the shares looking cheap on a price-to-earnings ratio of two have piqued my interest. However, I’d expect this dividend to be cut as the business seeks to reshape itself.

I could make a case for both sides of the argument for avoiding and buying the shares.

Personally, I think there’s a potential buying opportunity here. I’d be willing to buy some shares when I next have some cash.

Vodafone’s strategic review, and potentially paying down debt by restructuring, could bear fruit. CEO Margherita Della Valle has made some bold moves since coming into the post last year. If the firm can successfully sell its businesses in Spain and Italy to pay down debt, I can see a case for future returns and growth.

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.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone Group Public. 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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