FTSE 100 stock Vodafone (LSE: VOD) has underperformed recently. Over the last year, it has fallen about 25%.
Is this a good buying opportunity? Analysts at Deutsche Bank seem to think so. They reckon the stock could more than double from here.
Big gains on the horizon?
In a research note published last month, Deutsche Bank’s analysts put a 165p share price target on Vodafone.
Their view is that some of the telecoms company’s recent challenges (higher energy costs, emerging market currency pressures, etc.) are nearing an end.
Meanwhile, they expect the company to benefit from the disposal of weaker assets (it’s selling Vodafone Spain to Zegona) and industry consolidation in the UK (Vodafone and Three have agreed to merge their UK telecoms networks in a move that will create the UK’s largest mobile phone operator).
“Vodafone is becoming easier to break out into its parts, revealing a prodigious under-valuation versus peers,” wrote the analysts.
Clearly, they see the stock as undervalued right now.
165p price target
Is a share price of 165p actually achievable though?
Possibly.
But I think several things would need to happen for the FTSE 100 stock to reach that price level.
First, we’d need to see solid growth on a consistent basis.
In recent years, Vodafone has really struggled on the growth front.
That said, for the three-month period to the end of June, the company generated group service revenue growth of 3.7%, so it could be on the right track here.
We’ll have more of an idea on top-line growth on 14 November, when the company reports its H1 results for the six months ended 30 September.
Second, we’d need to see debt come down.
At 31 March, net debt stood at €34bn. This level of debt is not going to be appealing to investors in a higher-for-longer interest rate environment.
That’s because higher interest payments are going to eat into profits.
Finally, we’d need to see cash flows and earnings comfortably cover the dividend payout.
Right now, there’s a fair bit of uncertainty in relation to the Vodafone dividend due to the fact that earnings for the current financial year ending 31 March 2024 are expected to be lower than last year’s dividend payout (the earnings forecast is 8.2 euro cents vs last year’s dividend payout of 9 euro cents).
If Vodafone was to reduce its dividend payout to a more manageable level (i.e., comfortably covered by earnings), it might actually improve sentiment towards the stock, as there would be more certainty in relation to the payout.
It definitely has scope to do this as right now the yield is around 10%.
My take
Personally, I wouldn’t expect to see a share price of 165p any time soon.
I do think Vodafone is on the right track.
Currently, it’s trying to streamline its operations and improve its performance.
But this isn’t going to happen overnight.
Ultimately, this is a large, complex business with many moving parts.
It’s worth noting that a lot of other analysts (JP Morgan, Barclays) have price targets for Vodafone around the 90p-95p mark.
I think these kinds of share price targets are far more realistic in the medium term.
