Much to the frustration of shareholders like me, the Vodafone (LSE:VOD) share price has been languishing between 63p and 78p since the start of 2024. At close of business on 24 May, it was 73.5p.
To see if this level’s justified I’m going to use some common valuation methods.
1. Earnings
Vodafone’s going through a restructuring exercise. If all goes to plan, it will soon dispose of its business in Spain followed by its Italian division.
Excluding these, the company reported a profit after tax for the year ended 31 March (FY24) of €1.57bn.
With a current market-cap of £20bn (€23.4bn at current exchange rates), the company’s trading on a historical price-to-earnings ratio of 14.9.
The three most valuable telecoms companies in Europe, Deutsche Telekom (Germany), Orange (France) and Swisscom (Switzerland), have historical earnings multiples of 16.3, 10.7 and 15 respectively.
Applying the average of these (14) to Vodafone’s FY24 earnings implies a stock market valuation of €22bn (£18.8bn).
Using this measure, the company’s share price should be 69.5p — 5.4% lower than its current value.
2. Assets and liabilities
At 31 March, the company had a book (accounting) value of €61bn (£52bn).
In other words, this would be the amount left to return to shareholders if it sold all of its assets for the amounts stated in its accounts, and used the proceeds to clear its liabilities.
This is equivalent to 192p a share — a 160% premium to its current stock price.
3. Enterprise value
Finally, I’ve looked at Vodafone’s enterprise value. This is a popular measure in the world of mergers and acquisitions as it represents the theoretical amount that someone would have to pay to buy a company. That’s because it includes debt which an acquirer would either take on or repay.
Enterprise value is calculated by adding a company’s market-cap to its borrowings and then deducting any cash.
At 31 March, Vodafone’s net debt — excluding Spain and Italy — was €33.2bn (£28.3bn). Add this to its current stock market valuation and its enterprise value is €56.6bn (£48.3bn), or 179p a share.
Fair value?
The average of these three valuations is 147p. On this basis, I believe there’s a reasonable case to be made for claiming that the company’s shares are undervalued.
But investors appear concerned about Vodafone’s high level of borrowings and stagnant earnings.
However, I’m encouraged by the company’s restructuring plan that seeks to improve its return on capital employed by “at least” one percentage point and reduce its debt. It also plans to focus more on its business customers that generate higher margins.
For these reasons, I intend to hold on to my shares.
But a company is only worth what someone is prepared to pay for it — currently the market has determined that 73.5p is fair. And this is close to my estimate using its profits.
This isn’t surprising given that most analysts prefer earnings-based valuation measures. Balance sheet metrics tend to feature less frequently.
However, I’m a firm believer that most investors act rationally and take into account a range of financial indicators.
It may take some time but, eventually, I’m hopeful that Vodafone’s stock will soon start appealing to value investors and its price driven higher.
