Vodafone Group Plc Could Be Worth 261p

A share price of 260p is achievable for Vodafone Group plc (LON: VOD) and here’s why…

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All of the recent bid speculation surrounding Vodafone (LSE: VOD) (NASDAQ: VOD.US) may have left many investors thinking that its shares now trade on a vast premium and are, as such, overpriced.

Indeed, with continuing talk of a potential bid from AT&T for at least part of Vodafone, shares are now at their highest level for 12 years.

However, despite this fact, are Vodafone’s shares really all that expensive?

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According to the price-to-book ratio, they are not at all expensive. Vodafone’s price-to-book ratio is currently just over 1.5, meaning that investors are currently paying 1.5x net asset value for shares in Vodafone. This seems to be a very fair price to pay, with the share price including just 50% of net assets as goodwill and, with Vodafone continuing to be a highly profitable company, this amount of goodwill does not seem to be a high price to pay.

Furthermore, with Vodafone forecast to generate around 10% of net assets as profit next year, it would take only five years for the goodwill currently included in the share price to be earned by way of profits. Although a relatively simple way to look at it (and not taking into account the effects of inflation), a payback period of five years sounds rather short.

Therefore, shares could have upside of 15%, achieved only by Vodafone moving to a price-to-book ratio of 1.75. This would represent a payback period (using profits) for goodwill of 7.5 years and, when the quality of Vodafone as a business is taken into account, such a payback period could be justified.

In addition, Vodafone continues to benefit from high barriers to entry, with the company owning vast swathes of infrastructure within the countries in which it operates.

This makes it hugely expensive for new entrants to compete, since they must either build their own infrastructure or (more likely) pay to use an existing operator’s infrastructure. Therefore, Vodafone continues to be in a very strong position, with its margins being relatively well protected as a result of the significant investment it has made in previous years.

So, with what looks to be a perfectly reasonable valuation and high barriers to entry, Vodafone could yet push on and make gains of 15% despite shares being at a 12-year high.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Peter does not own shares in Vodafone. The Motley Fool has recommended shares in Vodafone.

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