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Vodafone’s (LSE: VOD) share price is up 40% from its 9 April 12-month traded low of 62p. But I think it is heading a lot higher.
I base this on the extremely high analysts’ consensus forecasts for Vodafone’s earnings growth. This is the engine of any firm’s share price gains over time. And in this case, the projections are for a stunning 54.1% increase every year to the end of fiscal 2028.
It is essential to note here that a stock’s price and its value are different. Value reflects the fundamental worth of the underlying business, while price is just what the market will pay for a share at any point.
So where could the price be headed?
I start any share price assessment by comparing its key valuations with those of its peers. On the price-to-sales ratio to begin with, Vodafone’s 0.7 is bottom of the group, which averages 1.5. These firms comprise Orange at 0.9, BT at 1, Deutsche Telekom at 1.3, and Telenor at 2.9.
So Vodafone is very undervalued on this measure. The same is true on the price-to-book ratio, at which it trades at 0.5 (again bottom of the group) against a 2.2 peer average.
The second part of my price assessment involves running a discounted cash flow analysis. This uses cash flow forecasts for the underlying business to pinpoint where any stock should be trading.
The DCF for Vodafone shows its shares are a whopping 57% undervalued at their present 87p price. Therefore, their fair value is £2.02.
Its latest €2bn (£1.73bn) buyback also looks positive for price gains.
How does the business look?
More broadly, I think the key catalyst for an upwards re-rating of the share price will come from Vodafone’s merger with Three. Conversely of course, any significant merger mishandling remains the key risk.
The firm said in its 24 July Q1 fiscal-year 2025/26 results that new entity VodafoneThree started operating on 1 June.
This is the product of the December merger. Vodafone holds 51% of the new operation, with the remainder held by CK Hutchison Group Telecom Holdings Limited.
The two telecoms giants said on 2 June that they will invest £1.3bn in VodafoneThree’s network in the first year. The aim of this is to wrest control of the UK’s market leadership position from EE and O2.
This capital injection is part of a wider£11bn investment over the next 10 years. The objective here is to establish Europe’s most advanced 5G network. Overall, the combined VodafoneThree business is expected to yield cost and capital expenditure synergies of £700m after five years.
Will I buy the shares?
I already own shares in BT, so another telecoms stock would unbalance my portfolio.Even if I did not have this I would still be reluctant to buy a sub-£1 share, as this increases price volatility risk.
However, for less risk-averse investors whose portfolio it suits, I think Vodafone is well worth considering.
