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Should You Follow Director Buying At Vodafone Group plc And Rolls-Royce Holding PLC?

Directors have been splashing the cash at Vodafone (LSE: VOD) and Rolls-Royce (LSE: RR). Should follow their lead, and load up on shares?

Vodafone

This FTSE 100 giant has become hard to value since selling its 45% stake in Verizon Wireless for £84bn last year. Vodafone returned a big chunk of the windfall to shareholders, and is currently busy investing heavily to replace the substantial contribution to earnings and cash flow that Verizon had been making.

As a result of this situation, Vodafone currently trades on sky-high multiples of 37.7x trailing earnings of 5.55p, and 50.9x trailing free cash flow of 4.11p. Will Vodafone’s current share price prove to be expensive, cheap or fair when its investments come to fruition and earnings and free cash flow normalise?

It’s hard to say, particularly because the share price since the Verizon sale hasn’t simply reflected the market’s view of Vodafone’s future earnings, but also an ebb and flow of speculation about a takeover bid for the company.

Vodafone’s shares have traded between 185p and 255p since the Verizon sale, reaching the high-water mark in May this year when it looked like a bid from US group Liberty Global could be in the offing. However, there was no bid, but an announcement that the two companies were in early discussions about a possible exchange of selected assets. Last week it was announced that the discussions have terminated.

So, at what price are Vodafone’s shares worth buying? Well, chief executive Vittorio Colao and finance director Nick Read have strongly signalled the price at which they see value. As soon as the discussions with Liberty Global were terminated, Mr Colao bought 260,000 shares and Mr Read 180,000. Both directors paid 209.05p a share, for a combined outlay of £919,820.

Personally, I find valuing Vodafone too problematic and uncertain at the present time, but, if you have faith in the management, around 209p is the price you might want to look for.

Rolls-Royce

Rolls-Royce is facing challenges of a rather different kind to Vodafone. After a series of profit warnings, the shares of the aerospace giant are down somewhere in the region of 40% since early 2014. The company is facing a number of headwinds, including the low oil price, which is adversely impacting its Marine business, and a transition from older to newer engines, which is temporarily depressing profits in its Civil Aerospace business.

At the price of recent director buys, which I’ll come to in a moment, Rolls-Royce trades on 12.7x trailing 12-month earnings of 58p a share. On the face of it, this looks good value, but with lower profits to come in 2016, the forward multiple rises to 16.8x forecast earnings of 44p a share.

Nevertheless, directors have been buying shares recently on a scale not seen at the company in I don’t know how long. The recent big purchases are summarised in the table below

Director Date of purchase No. of shares Price per share Total investment
Ian Davis (chairman) 7 October 15,000 739.5p £110,925
David Smith (finance director) 7 October 2,684 739.5p £19,848
Lewis Booth (senior non-exec) 7 October 10,000 734.0p £73,400
Irene Dorner (non-exec) 8 October 5,000 740.1p £37,005

Despite the near-term headwinds, Rolls-Royce’s order book at the half-year end was up £2.8bn to £76.5bn, which represents 5.5x current annual revenue. Like the directors, I see good long-term value in the shares of this high-quality business, and would view the recent weakness as a buying opportunity.

Of course, directors of blue-chip companies receive handsome salaries from which to purchase shares. But here at the Motley Fool we believe you don't have to be a highly-paid director to build yourself a seven-figure nest egg for retirement.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the 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.