Vodafone (LSE: VOD) (NASDAQ: VOD.US) is something of an enigma.
It’s a company focused on growth, yet earnings per share fell last year — and we have a big 63% fall pencilled in for this year.
And with revenues in mature markets for basic mobile telephony services falling (organic services revenue in Europe fell 7.9% in the first quarter), Vodafone’s growth is largely focused on acquisition. But it sold its stake in Verizon Wireless, albeit for a healthy return. And the company’s very high forward P/E of 32 is, at least to some extent, based on hopes that a bigger fish will snap up Vodafone in its entirely at a high price.
Acquisition
Vodafone has been quietly buying up smaller operators and the days of serious 4G usage are still ahead of us, but when I read Vodafone’s utterances I find it hard to get a clear overall grasp of an overriding strategy — it seems to me to be something like “Buy and sell bits and pieces as and when we feel like it“.
To be fair, a company operating in so many parts of the world cannot employ the same strategy in every market — for example, service revenue is growing very nicely in the younger markets of India and Turkey while it’s falling in Western Europe, as the different markets are in very different stages of development.
But when I look at a multinational company, I want to see the whole being more than the sum of its parts. And I’m not seeing that here — I see Vodafone as more of a holding company owning a larger number of disparate smaller companies.
Interim results
What’s that got to do with first-half results, due on Tuesday 11 November?
I’m hoping they’ll bring a clearer focus, especially on Vodafone’s troubled acquisition of Kabel Deutschland — it looked like a done deal until Kabel shareholder and fund manager Elliott Management started demanding a much bigger price for its 13.5% stake, with allegations that Vodafone and Kabel were hiding something.
I’d also like to hear more on longer-term profit expectations; something to justify the current high P/E valuation.
The share price is down 14% over the past 12 months to 206p, but shareholders are well in profit this year once the post-Verizon handouts are included. And over the past ten years, Vodafone has given investors a 135% return (with all dividends reinvested), easily beating the FTSE 100.
I don’t see the attraction
But the shares’ P/E ratio has more than trebled since 2010, and unless we see a clear path to growing earnings to bring that down in the medium term, I see Vodafone as too expensive.