Vodafone (LSE: VOD) (NASDAQ: VOD.US) is a company that I don’t currently hold in my portfolio, but is becoming ever more appealing to me. Indeed, I’ve changed my stance from negative to positive in recent weeks as I look beyond the short run and consider Vodafone’s long-term potential.
Of course, the main reason for the increasing appeal is quite straightforward: I think that Vodafone is dirt cheap at current levels.
I feel this way on both an absolute (standalone) basis and from a relative perspective (when comparing Vodafone’s valuation to the wider market and to its industry group).
Indeed, Vodafone currently trades on a price-to-earnings (P/E) ratio of just 13.5, which, when you consider the quality and diversity of the company, seems attractive.
Furthermore, when comparing this P/E ratio to the FTSE 100 and to the telecommunications industry group to which Vodafone belongs, it highlights the relative value of the company. The FTSE 100 currently trades on a P/E of 15, while the telecommunications industry group has a P/E of 14.2.
In my opinion, Vodafone should not be trading on such a large discount; either to the wider market or to its industry group, due to its diversity, strategy and stability of operations. Therefore, I’m optimistic that, over the medium to long term, Vodafone’s present valuation discount to its industry group and index will narrow, making shares good value at current price levels.
Of course, an attractive share price is not the only reason why I’m keen on Vodafone and am thinking of adding it to my portfolio.
I’m also impressed with the scale of reinvestment within the business that Vodafone is undertaking.
For instance, capital expenditure has been very generous in recent years, with it averaging £4.75 billion per annum over the last five years. This may reduce free cash flow in the short run but increases the size of the asset base (as well as its quality) and puts Vodafone in a strong position to take advantage of increased future growth rates across Europe and the developing world in particular.
Therefore, high capex is good for shareholders in the long run and I’m completely convinced that this is a big positive for investors’ in the business.
So, I’m impressed by Vodafone’s low valuation based on the P/E ratio, both on an absolute basis and relative to its industry group and index. I’m also encouraged by high levels of capex, which I think will be hugely beneficial to shareholders in the long run.
> Peter does not own shares in Vodafone. The Motley Fool has recommended shares in Vodafone.