Valuations and Brief Thoughts About Vodafone

Recently I decided it was probably time for me to value and analyze each of the companies remaining in my portfolio from before I truly dedicated myself to learning and becoming a “true investor.”  I had never valued any of the companies I am going to be writing about in the next several days.  I have read at least one annual report and one quarterly report, along with a myriad of other articles about each of the companies in the time since I bought them, and I am going to offer my brief thoughts on each.

I am also going to decide if I should keep, buy, or sell any of the companies after determining if I think any of them are under or overvalued.

Vodafone Valuations and brief thoughts

Vodafone (VOD) valuations done on September 10th, 2012.  Valuations in millions of GBP, except per share information, unless otherwise noted.  Valuations were done using 2012 10K.

Asset Reproduction Valuation

Assets: Book Value: Reproduction Value:
Current Assets
Cash and Cash Equivalents 7138 7138
Short Term Investments 1323 1323
Accounts Receivable (Net) 3885 3302
Inventories 486 243
Prepaid Expenses 3702 1851
Other Current Assets 3491 1746
Total Current Assets 20025 15603
PP&E Net 18655 9328
Equity and Other Investments 35899 17950
Goodwill 38350 15340
Intangible Assets 21164 8466
Deferred Income Taxes 1970 1000
Other Long Term Assets 3482 1741
Total Assets 139545 69427

Number of shares are 5096

Reproduction Value:

  • With intangible assets and goodwill: 69427/5096=13.62 GBP per share = $21.80 per share.
  • Without intangible assets and goodwill: 45621/5096=8.95 GBP per share = $14.33 per share.

EBIT and Net Cash Valuation

Cash and cash equivalents are 7,138

Short term investments are 5,096

Total current liabilities are 24,025

Cash and cash equivalents + short-term investments – total current liabilities=

  • 7,138+1,323-24,025=-15,564
  • -15,564/5,096=-3.05 GBP per share=-$4.78 in net cash per share.

Vodafone has an EBIT of 11,187.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

  • 5X11,187=55,935+8,461=64,396
  • 8X11,187=89,496+8,461=97,957
  • 11X11,187=123,057+8,461=131,518
  • 14X11,187=156,618+8,461=165,079
  • 5X=64,396/5096=12.64 GBP per share=$19.79 per share.
  • 8X=97,957/5096=19.22 GBP per share=$30.09 per share.
  • 11X=131,518/5096=25.81 GBP per share=$40.41 per share.
  • 14X=165,079/5096=32.39 GBP per share=$50.71 per share.

Revenue and EBIT Valuation

Numbers:
Revenue: 46417
Multiplied By:
Average 6 year EBIT %: 15.87%
Equals:
Estimated EBIT of: 7366.4
Multiplied By:
Assumed Fair Value Multiple of EBIT: 5X
Equals:
Estimated Fair Enterprise Value of VOD: 36832
Plus:
Cash, Cash Equivalents, and Short Term Investments: 8461
Minus:
Total Debt: 34890
Equals:
Estimated Fair Value of Common Equity: 10336
Divided By:
Number of Shares: 5096
Equals: GBP 2.03 per share=$3.27 per share

The $3.27 per share is my low estimate of value.  My base estimate of value using an 8X multiple was $10.16 per share, and my high estimate of value using an 11X multiple was $17.25 per share.

Price to Book and Tangible Book Valuation

Numbers:
Book Value: 126431.8
Minus:
Intangibles: 23806
Equals:
Tangible Book Value: 102625.8
Multiplied By:
Industry P/B: 1.7
Equals:
Industry Multiple Implied Fair Value: 174463.8
Multiplied By:
Assumed Multiple as a Percentage of Industry Multiple: 65%
Equals:
Estimated Fair Value of Common Equity: 113401.5
Divided By:
Number of Shares: 5096
Equals: GBP 22.25 per share=$35.62 per share.

The $35.62 per share is my low estimate of value.  My base estimate of value using a 95% multiple was $52.05 per share and my high estimate using a 125% multiple was $68.49 per share.

FCF and Cash Flow Valuation

Numbers
Operating Cash Flow: 12755
Minus:
Capital Expenditures: 7852
Equals:
Free Cash Flow: 4903
Divided By:
Industry Median FCF Yield: 6.17%
Equals:
Industry FCF Yield Implied Fair Value: 79465
Multiplied By:
Assumed Required FCF Yield As A % of Industry FCF Yield: 65%
Equals:
Estimated Fair Value of Common Equity of VOD: 51652.25
Divided By:
Number of Shares: 5096
Equals: GBP 10.14 per share=$16.23 per share.

Vodafone’s FCF yield is 5.41%.  The companies I used as comparisons are Verizon, China Mobile, and AT&T.

The $16.23 per share is my low estimate of value.  My base estimate of value was $23.71 per share and my high estimate was $31.20 per share.

Vodafone’s debt ratios are as follows:

  • Current assets to current liabilities: 20025/24025=0.83
  • Total debt to equity: 34957/76935=45%
  • Total debt to total assets: 34957/139576=25%

Brief Thoughts and Conclusions

Vodafone’s valuations are all over the place from a low of $3.27 a share to a high of $68.49 per share.  My cost basis for VOD is $27.37 per share.

After looking at its margins, reading its annual report and all that I have read since buying into Vodafone, I would use either the 8X EBIT and cash valuation, $30.09 per share, or my low estimate of value in the price to book and tangible book valuation, $35.62 per share, as my estimate of intrinsic value.  I would probably lean towards the $30.09 estimate of intrinsic value just to be safe, meaning that I think Vodafone is about correctly priced.

Knowing what I know now, I would not have bought into Vodafone when I did, or at this time, as it does not meet my minimum 30% margin of safety.   Others reasons I would not buy into it at this time are:

  • The high debt levels.
  • Massive amounts of cap ex-needed constantly.
  • The problems that it has had in India and other countries lately
    .

I do not think that Vodafone is a bad company by any stretch of the imagination, I just bought into them at too high of a price and for the wrong reasons; mainly its dividend.

I really like that it is a truly global company with some very good assets, including being a 45% owner of Verizon.

For now I am going to hold onto Vodafone until there is some kind of clarity from Verizon on its dividend payment strategy towards Vodafone, and/or until I find another company to buy as I think I will have a hard time making money at my currently too high-cost basis in Vodafone, and I will possibly look to sell my stake in VOD when I find another attractive company.

2 Replies to “Valuations and Brief Thoughts About Vodafone”

  1. I sold out of VOD earlier this year, too. I saw someone do a quick-and-dirty valuation on VOD, and I became convinced that VOD was likely undervalued.

    I think investors in VOD will do OK, but it’s not a share to build a reputation on. Somewhat dull and lacklustre, I think there’s fairly low downside risk, but on the other side of the coin, modest upside.

    I’m not worried about the debt levels, as the company is not in danger of breaching any covenants, and is a utility-type business.

    1. Thanks for your comments.

      I agree with your points as I do not think that Vodafone is a bad business. Acutally out of all the telecoms I have looked into I like VOD the most out of all of them. I especially like its 45% ownership in Verizon.

      I too was not that worried about the debt, although it is higher than I would like. From a long term perspective I was more worried about the huge amount of cap ex that VOD had to put into the business constantly and the problems it has been having in India.

      Most worrisome of all to me though was that I bought at too high of a price in my opinion and would have had a hard time making money off the company in the long term. Me buying at what I deem to be too high a price is ultimately the reason I sold my position in Vodafone.

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