I own shares in two FTSE 100 companies that are struggling to rediscover past glories.
Vodafone (LSE:VOD) was once the largest company in the index, with a share price in excess of £5. Its shares now change hands for around 75p, having previously been over £1 in February 2023, albeit very briefly.
The last time Lloyds Banking Group (LSE:LLOY) stock was trading at more than 100p was in 2008. That was the year it completed its ill-fated takeover of HBOS.
Both are well-known brands with good reputations. But is it realistic to expect their share prices to return to £1?
Ringing the changes
Using one measure, Vodafone appears particularly cheap at the moment, which could help its shares recover.
Based on its balance sheet at 30 September 2023, its price-to-book (PTB) ratio is 0.36. This compares favourably to other telecoms companies in the FTSE 100. BT has a PTB of 0.95 while Airtel Africa‘s is 1.77.
Put another way, if the business ceased trading today, it would be able to return cash of 196p a share to its owners.
However, the company has many non-physical assets on its books — goodwill, licences and spectrum fees — that are hard to value accurately.
But even if these were written down by 50%, Vodafone’s assets less its liabilities would still be more than its current market cap.
However, the company has a mountain of debt — €65bn at 30 September 2023 — that needs to be serviced. Rising interest rates have increased the cost of a large proportion of this.
And it’s struggling to grow. The company’s preferred measure of profitability — EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases) — is expected to be lower in FY24 than it was in FY23.
Period
EBITDAaL (€bn)
FY20
14.9
FY21
14.4
FY22
15.2
FY23
14.7
FY24 (forecast)
13.3
FY25 (forecast)
13.4
Source: company financial reports / FY = financial year to 31 March
Conscious of this, the directors have embarked on a major cost-cutting programme, entered into an agreement to sell its interests in Spain, announced plans to merge its UK operations with Three and implemented some significant price increases.
A dark horse
Like Vodafone, Lloyds stock market valuation is less than its book value.
It has a PTB of 0.64. But unlike the telecoms giant, it’s higher than its peers — NatWest Group (0.53) and Barclays (0.31).
However, underlying profit is forecast to grow over the next four years. It was £7.4bn in 2022 and it’s expected to be 11% higher within four years.
Period
Forecast underlying profit (£bn)
FY23
7.6
FY24
7.3
FY25
7.7
FY26
8.2
Source: company financial reports / FY = financial year to 31 December
However, for the bank to have a share price of £1, earnings are going to have to more than double.
And with significant exposure to the UK economy, I can’t see this happening soon. The UK’s gross domestic product isn’t expected to return to its long-term trend rate until 2027.
Who might make it?
I think the Vodafone share price could reach £1 again. But it might take a few years and a lot depends on its business performance. The anticipated benefits from its turnaround plan, and its simplified corporate structure, will take a while to feed through to its bottom line.
As for Lloyds, I believe it to be highly unlikely. I don’t think the bank’s current stock market valuation accurately reflect its true worth. But something game-changing would have to happen for its shares to break through the 100p barrier once more.
The post Will these two downtrodden FTSE 100 stocks reach £1 again? appeared first on The Motley Fool UK.
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James Beard has positions in Lloyds Banking Group Plc and Vodafone Group Public. The Motley Fool UK has recommended Airtel Africa Plc, Barclays Plc, Lloyds Banking Group Plc, and 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.
