Vodafone’s (LSE: VOD) share price is down 15% from its 17 September one-year traded high of 79p.
Such a steep fall might indicate a bargain for those whose portfolios the stock suits. Or it might signal that the firm is just worth less than it was before.
I ran valuation measures and models I have trusted most in 30 years as a private investor to ascertain which it is.
What does the share price mean in value terms?
The first element in my pricing analysis is to compare a firm’s key valuations with its competitors.
On the price-to-earnings (P/E) ratio, Vodafone currently trades at just 8.7. This is bottom of its peer group and way off their average P/E of 18.7.
This group comprises Orange at 13.4, BT Group at 18.1, Telenor at 18.8., and Deutsche Telekom at 24.5. So, Vodafone shares look very undervalued on this measure.
The same applies to its price-to-book ratio of only 0.3 compared to its competitor average of 1.7. And it is also true on the price-to-sales ratio, on which it trades at 0.6 against a 1.2 peer average.
Undervaluations on all three key measures are an extremely promising start in my view. However, the acid test is a discounted cash flow (DCF) analysis. This examines the price a stock should be, based on its future cash flow forecasts.
Using other analysts’ figures and my own shows Vodafone’s share price is 55% undervalued at its current 67p. So the fair value per share is technically £1.49.
It may go lower or higher than this due to market unpredictability, of course. However, the clean sweep on key valuations and the strong DCF under-pricing confirm to me it may be a huge bargain.
Does the core business support this outlook?
H1 fiscal year 2025 results saw total revenue increase 1.6% year on year to €18.3bn (£15.47bn). Analysts forecast Vodafone’s earnings will grow 3.19% a year to end-2027. And it is these that drive a firm’s share price and dividend over time.
I think the main risk to these is any mishandling of the merger with Three. This could negate the potential benefits of the now-approved deal, which could be considerable.
Most notably for me these include the creation of a larger network with faster speeds and better coverage for customers.
Will I buy the stock?
A key factor in stock selection is appreciating one’s position in the investment cycle. The younger one is, the longer the time a stock has to recover from any price shocks.
Aged over 50 now, I am at the later stage of that cycle. This means I cannot afford to take the investment risks I could when I was younger.
And a key risk for me in this context in Vodafone is its sub-£1 price. This means that each penny represents nearly 1.5% of its total value. That is too high a price volatility risk for me to take at my age.
That said, if I were even 10 years younger I would probably buy the stock now, based on its earnings growth potential. If I were of a more cautious disposition, I might wait to see how the merger with Three was progressing.
