Vodafone (LSE: VOD) is among the best-known companies in the FTSE 100. However, it’s been a disappointing performer for some time. It’s over two years since its shares traded above 200p. Lately, they’ve been changing hands for not much more than a quid. Can Vodafone’s share price ever go back up to 200p?
Before addressing that question, let me tell you about a lesser-known name in the telecoms sector. The Gamma Communications (LSE: GAMA) share price has soared over the period Vodafone’s has slumped. Indeed, last month it made a new all-time high. Could Gamma continue to be a star performer?
Gamma share price vs Vodafone share price
Looking at the year-to-date performance, the Vodafone share price is 25% below its level at the start of the year. Meanwhile, Gamma’s shares have risen 18%. And that despite being currently over 10% off last month’s all-time high of 1,755p.
This could be a good dip-buying opportunity, providing Gamma’s shares revert to their previous upward trajectory. On this score, it’s worth noting that the 2020 performance is no flash in the pan.
Gamma has performed strongly every year since it floated at 187p a share in 2014. Today, its market capitalisation is £1.5bn, and it’s among the 10 biggest companies on London’s AIM market.
Huge growth opportunity
Gamma is a leading supplier of unified communications services. That means video calling, instant messaging, multi-party conferencing and a whole lot more. Its customers are in the SME, public sector and enterprise markets.
The UK is its biggest geographical market, but it’s rapidly expanding in Europe. This represents a huge growth opportunity. Particularly as the coronavirus pandemic has shown that many employees can work effectively from home with the right communications kit.
Gamma’s trading at a premium rating of 29-times forecast 2021 earnings. However, I’d buy the shares today in the belief that we’re looking at a business with strong multi-year growth prospects.
Why is the Vodafone share price so low?
It’s not hard to see why some shareholders who bought Vodafone at 200p+ a few years ago have dumped the stock. And why the company has failed to garner sufficient interest from new investors to arrest the share price decline.
Vodafone has struggled to grow its revenue and earnings in recent years. Shareholders have also suffered a brutal dividend cut, particularly hard on those who bought the stock for income.
In the rear-view mirror, Vodafone isn’t a pretty sight. However, looking ahead there’s a far more appealing picture.
Too cheap to ignore
City analysts are forecasting explosive earnings growth in the years ahead. For Vodafone’s current financial year (ending 31 March 2021), they expect earnings per share (EPS) to increase 25%. Furthermore, they forecast a similar rate of growth for both fiscal 2022 and 2023.
The price-to-earnings (P/E) ratios for the three years are 16.8, 13.3 and 10.7. The price-to-earnings growth (PEG) ratios are 0.7, 0.5 and 0.4. These are well to the value side of the PEG fair value marker of 1.
If Vodafone delivers on the earnings growth, and the market were to give it a PEG fair-value rating by year two, it would require the share price to rise to 200p. With the company also currently offering a dividend yield of 7.6%, I reckon the Vodafone share price is too cheap to ignore. I rate the stock a ‘buy’.
G A Chester has no position in any of the shares mentioned. 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.