Vodafone, cheap to buy?

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Barron’s, the paragon of good investing has decided that Vodafone is cheap and worth a second look for investors. I tend to agree given the company’s global footprint. Ever since the company made a bid for AT&T Wireless, the company has seen its stock come under pressure that has made the stock worth a second look, the magazine says.

bq. Since Chief Executive Arun Sarin’s arrival about one year ago to replace Chris Gent, the company has tried to change emphasis. Gent built Vodafone into far and away the world’s biggest wireless firm, with about 130 million subscribers in more than two dozen countries, spending many billions of dollars, pounds and euros in the process. Under Sarin, a more shareholder-friendly Vodafone was supposed to reap the rewards of that empire. Last autumn it raised its dividend 20% and introduced a fat £2.5 billion share-buyback program.

What’s most amazing about this company has the financial transformation it has gone through. I think it is going to be interesting to watch how it leverages its immense bankroll.

bq. A less emotional examination of the facts on the ground suggests the market’s black mood is obscuring many appealing facets. Sporting a market capitalization of £93.7 billion ($167 billion), Vodafone has a strong balance sheet, with just about £11 billion in net debt. It’s generally considered the best-run operator and will probably produce over £7 billion of free cash flow in each of the next couple of years, thanks to increasing revenue growth. Meanwhile, earnings per share are expected to rise at double-digit rates over that period as well, a pace that’s among the best in the industry.

So why the concerns? I think the company has no or little presence in three of the largest and fastest growing cell phone markets – China, India and US. I think with companies like Samsung and LG building CDMA + GSM phones, US issue can be easily addressed by Vodafone. Many of its globetrotting customers can easily buy one of these handsets and be ready to roam. In China, Vodafone has made small equity investments and there is little more it can do. As far as India is concerned, when that country raises the foreign ownership in telecom, I would expect Vodafone to make a serious bid for one of the larger carriers. Bharti Telecom and Idea Cellular come to mind, or even the debt ridden BPL Mobile.

bq. In the longer term, Vodafone’s unusually low valuation — it now sells at a discount to the sector and the broad market despite its dominant position, financial strength and strong brand name — means the stock could rise 20% to 40% over the next 24 months even as it returns cash to shareholders.

You can read the story and get the opinion of financial types there. I am not going to bother trying to sum-up their mutterings. (Paid subscription required!)

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