Yesterday, telecommunications giant Vodafone (LSE: VOD) posted its FY2021 preliminary results. It’s fair to say the market wasn’t impressed. The FTSE 100 stock ended the day down 9%.
Is this a buying opportunity for me? Let’s take a look at the results, and the investment case for Vodafone.
Vodafone: full-year results missed expectations
Yesterday’s results from Vodafone, for the year ended 31 March, weren’t brilliant, but they weren’t terrible either, in my opinion.
On the positive side, operating profit came in at €5,097m, 24% higher than the figure of €4,099m posted a year earlier. Meanwhile, adjusted earnings per share came in at 8.08 euro cents, up from 5.60 euro cents a year earlier. The company declared a dividend of nine euro cents – the same as last year.
On the downside, revenue was 2.6% lower for the year at €43,809m. This lack of top-line growth is an issue I have highlighted in the past. Meanwhile, free cash flow (FCF) for the period was well down on FY20. For the period, FCF was €3,110m versus €4,949m a year earlier.
It’s worth noting that full-year adjusted earnings came in at the bottom of the company’s guidance and missed analysts’ expectations. That’s the main reason the share price fell yesterday.
Looking ahead, Vodafone does expect its performance to improve. For FY22, it is targeting adjusted earnings of between €15bn and €15.4bn (versus €14.4bn in FY21) and adjusted free cash flow of at least €5.2bn.
Meanwhile, in the medium term, the group is aiming to achieve growth in both Europe and Africa. In these regions, it is targeting mid-single-digit growth in both earnings and FCF.
Vodafone shares: the investment case
Looking at the investment case for Vodafone, I can’t say I’m excited about the stock.
Sure, there is a big dividend yield on offer. Currently, the yield is about 6%. That’s handy in today’s low-interest-rate environment.
There is also the fact that Chairman Jean-François van Boxmeer purchased 305,000 Vodafone shares yesterday, spending approximately £412,000 on stock. This is encouraging as it suggests that the insider is confident about the future and that he expects the stock to rise.
On the downside, however, growth is very sluggish. This year, analysts expect revenue growth of just 2.5%.
Meanwhile, return on capital employed (ROCE) – a measure of profitability that top investors such as Warren Buffett and Terry Smith pay close attention to – is very low. Between FY15 and FY20, Vodafone had an average ROCE of just 2%, which is poor. Top companies tend to have a ROCE of 20%+.
There’s also the debt on the balance sheet. At 31 March, Vodafone had net debt of €40.5bn. That’s about 2.8 times last year’s adjusted earnings. That’s quite high, which adds risk to the investment case.
Finally, I don’t see the stock as cheap. Currently, it sports a forward-looking P/E ratio of about 17.
My view on VOD shares
All things considered, I think there are much better stocks I could buy today. I’d rather invest in a high-quality business with strong long-term growth potential.
