The last year has seen a continued downfall for the Vodafone (LSE: VOD) share price. It has declined by 33% in just 12 months, with investors now appearing to view it very differently than they did just a few years ago.
Back then, it had almost utility-like status in the eyes of investors. Its dividend was high but reliable, while its growth prospects were steady and robust. Now, though, it is viewed as somewhat risky by investors, with its financial outlook causing a degree of fear among investors.
Could it now offer recovery potential? Or, is it worth avoiding alongside what appears to be an overpriced stock that released a trading update on Monday?
The company in question is safety and regulatory compliance specialist Marlowe (LSE: MRL). Its 2019 financial year saw good progress for the business, with its revenue rising by 62% to £130m. Acquisitions and broad-based organic growth contributed to its improved performance, while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is due to be slightly ahead of expectations.
Although the company appears to have a bright financial future, with its bottom line forecast to rise by 15% in the current year, it seems to be overpriced. For example, Marlowe trades on a price-to-earnings growth (PEG) ratio of 2.2, which suggests that it lacks a margin of safety. Therefore, it may be worth avoiding at the present time, with there being better-valued opportunities available elsewhere.
By contrast, Vodafone now seems to offer a wide margin of safety. Clearly, it is unusual for a FTSE 100 company with the track record of dividend payments that Vodafone has to experience such a large share price fall at a time when the wider index has fared much better.
However, investors now seem to be anticipating a lower growth rate in earnings over the long run. The company’s shares trade on a price-to-earnings (P/E) ratio of around 14, while their dividend yield of over 9% suggests that there is a lack of confidence among investors regarding dividend growth. Indeed, there are concerns among some investors that a dividend cut may be ahead, such are the financial commitments resulting from an aggressive acquisition and investment strategy.
A change in management may mean a period of greater instability in the short term. But the company’s fundamentals suggest that it could offer strong growth. As well as a fair valuation and a high yield, the company’s performance outside of Europe was strong according to its recent update. Changes being made to its structure could create a simpler business that is better positioned to deliver improving earnings growth.
Therefore, for income and value investors alike, now could be the right time to buy Vodafone. It could offer recovery potential in the long run as a result of a favourable risk/reward ratio.
Peter Stephens owns shares of Vodafone. The Motley Fool UK has no position in any of the shares mentioned. 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.