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Why I think the Vodafone share price is primed to beat the FTSE 100

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While the FTSE 100 has risen by around 10% since the start of the year, a number of companies have continued to decline following a tough 2018. Among them is Vodafone (LSE: VOD), with the company’s share price down by over 5% so far in 2019.

Although the stock has been on a downtrend for a prolonged period of time, it may offer a wide margin of safety. This could mean that it is able to deliver a successful turnaround over the long run. It could, therefore, offer investment appeal – unlike a rather overpriced stock which released a trading update on Friday.

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High price

The company in question is innovative ingredient solutions business Treatt (LSE: TET). It has continued to perform well in the first half of its current financial year, with revenue rising by around 7% compared to the same period of the previous year. It has been able to achieve this level of growth despite a market backdrop of price weakness in some key raw materials for its largest product category, citrus.

Looking ahead, the company expects continued price weakness in the citrus product category, although it remains encouraged by its order book. It will continue to invest in its capacity and scientific capabilities in order to deliver sustainable long-term growth.

With Treatt forecast to post a rise in net profit of 4% in the current year, it seems to be performing well. However, a price-to-earnings (P/E) ratio of 23 suggests that it may lack a margin of safety. Therefore, now may be the right time to avoid the company when there are other better value options available elsewhere.

Recovery potential

Among them is Vodafone, which now has a dividend yield of over 9% following a seemingly endless share price decline over the last couple of years. Although a number of other FTSE 100 shares have become increasingly popular among investors in 2019, the stock has continued its decline as investors have retained a cautious attitude as it seeks to deliver on its ambitious growth plans.

They include the €19bn acquisition of Liberty Global’s European assets. Although the acquisition may put it in a stronger position in a number of key markets, there may be greater pressure on its balance sheet as a result. With ambitious capital spending plans and a generous dividend to pay for, many investors fear that the company’s dividend prospects could be challenging.

As part of its growth strategy, Vodafone is seeking to put in place a simpler business model. Under a new CEO, the company is entering into a greater number of partnerships which could strengthen its position in a number of growth markets. And while M&A activity may prove to be costly, it could catalyse the company’s long-term growth rate across a number of key markets.

Since the stock appears to offer good value for money due to its dividend yield being more than twice that of the FTSE 100, it could offer recovery potential over the long run. While it has disappointed in the past, its risk/reward ratio looks like it is becoming increasingly favourable.

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Peter Stephens owns shares of Vodafone. The Motley Fool UK has recommended Treatt. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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