Is Vodafone Group plc A Promising Capital-Growth Investment?

VodafoneAccording to data provider Digital Look, 15 out of 26 City stockbrokers have either a ”neutral’ or a ‘sell’ rating on Vodafone Group (LSE: VOD) (NASDAQ: VOD. US), the mobile phone and communication specialist.

The cynic in me interprets those ‘neutral’ ratings, 12 in total, as ‘sell but we daren’t say so’, because stockbrokers probably have strong incentive to stay sweet with the companies that power the investment industry, and because individual analysts will, no doubt, want to hedge their opinions for fear of looking wrong in the future.

I’d argue that broker opinion seems almost 60% to the ‘sell’ end of the scale on Vodafone right now, so what’s up with the firm?

Why aren’t they saying ‘buy’?

Historically, Vodafone’s business expanded fast at it caught the wave of growth in mobile-phone usage from very little in the 1980’s to ubiquity today. Throughout the 80s and 90s, Vodafone enjoyed a high P/E rating and investors viewed the firm as a growth proposition performing well.

That situation changed with the turn of the millennium as Vodafone’s business growth seemed to slow with apparent market saturation. By then Vodafone was already a huge business and the firm’s P/E rating seemed to slim down to align with other big companies on the stock market, prized more for their ability to pay a decent dividend  than for their stunning growth prospects.

For a long time thereafter, Vodafone chugged along with a P/E rating around 10 and the firm paid a steady dividend with a yield running around the 5% mark. So far, so boring, predictable and apparently safe for investors. However, things changed when Vodafone sold its American arm this year. After completing the deal and, therefore, slashing the size of its ongoing business, Vodafone is left with a racy looking forward P/E rating running at about 31 for 2016. That seems to value rump-Vodafone just like the nimble, fast-grower the firm was decades earlier.

Does the market have Vodafone’s valuation right, or is valuation the thing that’s making most of the City analysts nervous?

What’s driving the share price?

It’s true that Vodafone gained some cash from the sale of its US interests, which it intends to invest to drive future growth in emerging and established markets as well as into buying back some of its own shares — both factors with potential to push up the share price over time.

Vodafone’s business still seems well placed for growth. The industry has moved well beyond mobile voice communications and there’s increasing demand for data transfer, such as texting and internet applications. However, it’s hard to see how the firm’s prospects became so much more attractive practically overnight when it cashed-in its US investment.

Last year Europe delivered around 64% of Vodafone’s non-American earnings, down 10%. The rest came from the fast-growing emerging markets of Africa, the Middle East and the Asia Pacific, where earnings increased 10% on the year-ago figure. So if Vodafone keeps growing its emerging-market business by double-figure annual percentages, around 50% of earnings could originate from up-and-coming regions within five years. Yet business in Europe continues to drag with what the firm describes as intense macroeconomic, regulatory and competitive pressures.

Vodafone’s forward prospects seem attractive but not stunning, and I can’t help thinking that a reduced Vodafone business since the divestment of its US interests might have attracted speculation that the firm is more easily digestible as a takeover proposition. If another company does bid for Vodafone in the future, a lot of investor gain must surely already be in the share price.

What now?

Vodafone isn’t cheap, and for that reason I don’t think the firm is an attractive capital-growth investment just now.

Instead, I'm looking at three other companies that look set to do well this year. In fact, the Motley Fools top team of share analysts reckons these three could be among the best picks for 2014 and beyond.

One company is a largely ignored small cap. There's a play on technology focused high-tech defence applications, and the third provides a vehicle to ride emerging-market potential.

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Kevin Godbold has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.