2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8.8% this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) still offer good value, after five years of market gains.
Back to basics
Vodafone’s share price has risen by 46% so far this year, mainly thanks to its $130bn deal to sell its 45% interest in Verizon Wireless to Verizon Communications. Shareholders will receive a mixture of cash and Verizon shares worth around 112p, and Vodafone has also promised to increase its full-year dividend by 8% to 11p.
Since the deal, Vodafone’s share price has been given further momentum by rumours suggesting that that US giant AT&T could buy Vodafone, once the Verizon deal has completed.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As potential buyers of Vodafone today, we need to consider whether the mobile operator’s share price currently represents good value, without relying on a takeover deal to provide a one-off gain.
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 15.0 |
| Trailing dividend yield | 4.5% |
| Operating margin | 11.5% |
| Net gearing | 28.5% |
| Price to book ratio | 1.3 |
The figures above suggest that Vodafone is fairly priced, but certainly not cheap, given that its southern European businesses are currently struggling against very difficult economic conditions.
2014: All change at Vodafone
It’s very hard to predict how Vodafone’s business will change after the Verizon Wireless sale completes. Vodafone is planning to keep around $35bn of cash from the sale, which it will be able to use to cut debt, invest in network upgrades and spend on acquisitions, but there is no guarantee this approach will be successful.
Vodafone’s financial year ends in March, and consensus forecasts currently suggest adjusted earnings of 13.7p per share for the current year, which gives a fairly strong valuation:
| Metric | Value |
|---|---|
| Forecast P/E (2013/14 adj. earnings) | 16.9 |
| Forecast yield (2013/14 dividend) | 4.8% |
| Forecast earnings growth (2013/14) | -12.4% |
As a shareholder, I think that an AT&T bid is quite likely, but if this fails to happen, I expect Vodafone’s share price to underperform the market next year and possibly beyond, until the company demonstrates that it is generating profitable new growth.