Value investors are always looking for good deals – similar to buying £1 coins for less than their true worth. Currently, Vodafone (LSE:VOD) shares, with a price-to-book (P/B) value of just 0.35, seem to offer just such a bargain.
But is this really the case, or is there more to the story?
Hold the line
At first glance, Vodafone’s low P/B ratio suggests that the company is undervalued.
However, delving deeper into its financials reveals a less rosy picture.
The telecoms giant recently reported a 1.3% decline in group core earnings to €14.7bn (£12.78bn) for the year, missing its own targets.
This, after years of underperformance, led the company to announce it would be slashing 11,000 jobs in an effort to right the ship.
All the while, more and more competitors are appearing in the rear-view mirror, threatening to cause still greater problems for the FTSE 100 company.
Dialling into debt and competition
Vodafone’s considerable debt, equal to 110% of the value of its equity, is weighing the company down. The average debt-to-equity ratio in the telecoms sector is 80%.
All the while, Vodafone faces fierce competition from rivals in the sector.
Germany, its largest market, has returned to growth overall, but the company reported service revenue down 1.1% in Q2 after a 0.5%drop in Q1, mainly because of broadband customer losses.
Similarly, Vodafone’s performance in Italy and Spain has also been affected by fierce competition, leading to declining quarter-on-quarter results.
In the high-growth African segment, Vodafone is very far behind its FTSE 100 rival Airtel Africa in terms of market penetration.
But It’s not all bad news. The UK market brought some cheer for Vodafone as the company experienced strengthened service revenue following consumer price rises and a return to growth in the business segment.
‘Selling a kidney’
While Vodafone’s assets, like its network infrastructure, have inherent value, converting this into tangible financial gains is another matter. Tech entrepreneur Scott Galloway put it tastelessly but perhaps accurately in a recent podcast. He said capitalising on a troubled company’s book value is like trying to sell an unemployed person’s kidney.
Putting aside the obvious ethical problems, a person’s organs have a massive theoretical value, but extracting that isn’t practical. Vodafone’s assets – for example, its network infrastructure, telephone masts, and offices – while valuable on paper would in practice be difficult to convert into cash.
Therefore, the analogy of buying Vodafone shares as being similar to getting £1 coins for just 35p seems overly simplistic.
To summarise, Vodafone’s challenges include declining earnings, heavy debt, and competitive pressures. These cast a shadow over its investment appeal in my opinion.
I won’t be adding Vodafone to my portfolio, despite its rock-bottom valuation and 10% dividend yield.
The post Are Vodafone shares like buying £1 coins for 35p? appeared first on The Motley Fool UK.
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Mark Tovey has no position in any of the shares mentioned. 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.
