Picture supply: Getty Photographs
Worth traders are all the time on the lookout for good offers – just like shopping for £1 cash for lower than their true value. At present, Vodafone (LSE:VOD) shares, with a price-to-book (P/B) worth of simply 0.35, appear to supply simply such a cut price.
However is that this actually the case, or is there extra to the story?
Maintain the road
At first look, Vodafone’s low P/B ratio means that the corporate is undervalued.
Nevertheless, delving deeper into its financials reveals a much less rosy image.
The telecoms big not too long ago reported a 1.3% decline in group core earnings to €14.7bn (£12.78bn) for the yr, lacking its personal targets.
This, after years of underperformance, led the corporate to announce it could be slashing 11,000 jobs in an effort to proper the ship.
All of the whereas, an increasing number of rivals are showing within the rear-view mirror, threatening to trigger nonetheless higher issues for the FTSE 100 firm.
Dialling into debt and competitors
Vodafone’s appreciable debt, equal to 110% of the worth of its fairness, is weighing the corporate down. The typical debt-to-equity ratio within the telecoms sector is 80%.
All of the whereas, Vodafone faces fierce competitors from rivals within the sector.
Germany, its largest market, has returned to development total, however the firm reported service income down 1.1% in Q2 after a 0.5percentdrop in Q1, primarily due to broadband buyer losses.
Equally, Vodafone’s efficiency in Italy and Spain has additionally been affected by fierce competitors, resulting in declining quarter-on-quarter outcomes.
Within the high-growth African phase, Vodafone may be very far behind its FTSE 100 rival Airtel Africa by way of market penetration.
However It’s not all dangerous information. The UK market introduced some cheer for Vodafone as the corporate skilled strengthened service income following client worth rises and a return to development within the enterprise phase.
‘Promoting a kidney’
Whereas Vodafone’s belongings, like its community infrastructure, have inherent worth, changing this into tangible monetary positive factors is one other matter. Tech entrepreneur Scott Galloway put it tastelessly however maybe precisely in a current podcast. He mentioned capitalising on a troubled firm’s ebook worth is like attempting to promote an unemployed individual’s kidney.
Placing apart the plain moral issues, an individual’s organs have an enormous theoretical worth, however extracting that isn’t sensible. Vodafone’s belongings – for instance, its community infrastructure, phone masts, and workplaces – whereas priceless on paper would in apply be troublesome to transform into money.
Subsequently, the analogy of shopping for Vodafone shares as being just like getting £1 cash for simply 35p appears overly simplistic.
To summarise, Vodafone’s challenges embrace declining earnings, heavy debt, and aggressive pressures. These solid a shadow over its funding attraction in my view.
I received’t be including Vodafone to my portfolio, regardless of its rock-bottom valuation and 10% dividend yield.
