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
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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.
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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.
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.
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.