Vodafone’s (LSE: VOD) share price tumbled in the global market rout following the US’s imposition of tariffs on much of the world.
As a former senior investment bank trader aged over 50 now, I have seen several market shocks. These frequently provided opportunities to make quick short-term profits.
But as a multi-decade private investor they also often enabled me to pick up good stocks at bargain prices for the long term.
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At moments of widespread trading turbulence such as these, I focus on core share value, not on market noise.
How does the business look?
Before the present market tumult, Vodafone had looked on a promising path to me — and it still does.
Its Q3 results showed group service revenue jumping 5.2% year on year to €7.9bn (£6.78bn). This increase in service revenue occurred despite a 6.4% contraction in its German business. It followed last year’s change in its pay-TV laws that allowed residents to opt out of TV services provided by their landlords.
More positively though, Vodafone sold its Italian business to Swisscom for €8bn. The money will be used to reduce net debt and to execute a €2bn share buyback. These are supportive of share price gains.
Vodafone’s now-approved merger with Three in the UK also looks very promising to me. It should bring coverage and cost benefits to the new operation.
A risk for the firm is any mishandling of the merger that would negate these benefits.
Are the shares undervalued?
As it stands, analysts forecast that the firm’s earnings will rise by 2.2% a year to the end of 2027. It is growth here that powers a company’s share price and dividend over the long term.
Currently, Vodafone trades at a price-to-earnings ratio of just 8 — bottom of its competitor, which averages 15. These comprise Telenor at 10.3, Deutsche Telekom at 13.7, Orange at 16.1, and BT at 20.
So, it looks very undervalued on this basis.
It looks the same on its 0.3 price-to-book ratio too, with a peer average of 1.8. And the same applies to its price-to-sales ratio of 0.5 compared to the 1.3 average of its competitors.
A discounted cash flow analysis shows Vodafone is 52% undervalued at its current 66p price.
Therefore, its fair value is £1.38, although stock prices can go down as well as up.
Will I buy the stock?
The younger the investor, the longer they can wait for a stock or market to recover from any shock. This means they can take more risk in the short term.
However, I am over 50 now, which puts me in the later stage of my investment cycle. Consequently, I have less time to wait for a recovery from any such shock and therefore should take less risk.
If I were younger, I would buy Vodafone shares on the basis that its core business looks strong to me. This should power its share price and dividend higher over the long term.
For me though, there is a significant additional risk associated with its sub-£1 share price. It means that every penny in price equates to 1.5% of the stock’s value.
I am not willing to take that price volatility risk at my age, so will not buy the stock.
