The Vodafone share price is 24% undervalued, according to analysts
The Vodafone (LSE:VOD) share price continues to lag the FTSE 100 as a whole. But if analysts are to be believed, the telecoms group’s currently undervalued by approximately 24%. That’s because the average of their 12-month price targets is 87p, with a range of 54.4p-142p.
However, the consensus view disguises a difference of opinion. Of the 16 ‘experts’ covering the stock, five are advising their clients to Buy, nine are Neutral and two are suggesting shareholders’ Sell.
Obviously, they can’t all be right.
Financial performance
On 20 May, the group will report is results for the year ended 31 March (FY25). These are expected to show EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases) of €11bn (£9.4bn at current exchange rates).
Last year, Swisscom bought Vodafone Italy for 7.6 times adjusted EBITDAaL. Apply this to Vodafone’s expected FY25 profit, deduct the anticipated net debt position at the end of the financial year of €22.1bn (£18.9bn), and I think a sensible argument could be made for the group to be valued at €61.5bn (£52.6bn). That’s a 305% premium to its current (16 April) market cap.
Even if we used a lower multiple of 5.6, which Zegona Communications was happy to pay for Vodafone Spain, I believe a valuation of €39.5bn (£33.8bn) could be justified. That’s around 95% higher than the group’s present share price.
Unloved
However, despite these calculations, investors appear to have lost faith in the business. At one point, it was the UK’s most valuable listed company. Since April 2020, Vodafone’s share price has been the third-worst performer on the FTSE 100.
Some of this has resulted from a lack of earnings growth, both planned and otherwise. The company’s been selling various under-performing divisions and non-core assets, which is intended to make it more efficient and reduce its debt burden. However, its revenue and earnings are shrinking as a result.
Some unplanned events are also hurting the group. For example, in Germany, its biggest market, a law restricting the bundling of television contracts in apartment blocks means it’s losing customers.
An unclear picture
With all these changes, I think it’s difficult to know what a restructured Vodafone will look like. And I wonder if this uncertainty is weighing on the group’s share price.
Vodafone intends to merge its UK operations with Three to create the largest mobile network in the country. But British Steel’s well-documented problems could throw a spanner in the works. The chair of the House of Commons foreign affairs select committee has called for the UK’s intelligence agencies to look at the role of China in Britain’s telecoms industry. Three is ultimately owned by CK Hutchinson Group, which is listed in Hong Kong.
However, even if the merger doesn’t progress, the group’s likely to continue generating plenty of surplus cash, some of which it’s using to repurchase its own shares. And it’s doing particularly well in Türkiye and Africa.
Of course, valuing companies is difficult – I think the wide variation in the figures discussed above proves this. But in my opinion, the available evidence suggests that the current Vodafone share price undervalues the company.
For this reason, I believe the company’s one for growth stock investors to consider.
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James Beard has positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. 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.
