Since the end of February, Vodafone Group Plc (NASDAQ:VOD)’s share price has risen by nearly 10%, from $24.55 per share to $27 per share. The significant share price increase was due to the possibility that Verizon Communications Inc. (NYSE:VZ) could buy out Vodafone’s 45% stake in Verizon Wireless. So how much is Vodafone really worth when its 45% stake in Verizon Communications is taken into account?
Business snapshot
Vodafone Group Plc (ADR) (NASDAQ:VOD) is considered one of the largest global mobile communications company, operating in more than 30 countries with 40 partner markets worldwide. The majority of its revenue, £32.16 ($45.48) billion, or 69.2% of the total group revenue, was generated from the European market. The biggest market in the European market was Germany, generating nearly £8.2 ($12.35) billion in revenue, or 25.5% of the total European revenue. Italy ranked second with £5.63 ($8.48) billion in 2012 revenue while the UK and Spain contributed £5.36 ($8.07) billion and £4.7 ($7.08) billion in revenue, respectively.
A cash cow with reasonably leveraged balance sheet
In the past five years, Vodafone’s revenue has consistently increased, from £41 ($61.77) billion in 2008 to £46.4 ($69.9) billion in 2012. However, its EPS has fluctuated widely in the range of £0.58 ($0.87) to £1.64 ($2.47). What impresses me is Vodafone’s consistent cash flow and increasing dividends. Over the past ten years, the operating cash flow has fluctuated in the range of £10.3 ($15.52) billion to £13 ($19.58) billion while the free cash flow has varied in the range of £3.35 ($5.05) billion to £8.37 ($12.6) billion. Since 2003, Vodafone has kept raising its dividends, from £0.18 ($0.27) in 2003 to £0.89 ($1.34) in 2012. In terms of the balance sheet strength, Vodafone seems to be quite reasonably leveraged. As of September 2012, it had £69.43 ($104.6) billion in total stockholders’ equity, £7.6 ($11.45) billion in cash and £35.5 ($53.48) billion in both short and long term debt.
Peer comparison
At $26.70 per share, Vodafone is worth $132.64 billion on the market. The market is valuing Vodafone at only 8.16 times EV/EBITDA. Verizon Communications Inc. (NYSE:VZ) is trading at $47.48 per share, with a total market cap of $135.75 billion. Verizon Communications seems to be much cheaper at 6.0.8 times EV/EBITDA. Deutsche Telekom AG (ADR) (PINK:DTEGY), at a current price of $10.84 per share, is worth $46.61 billion on the market. Deutsche Telekom is the cheapest company among the three, with the valuation of only 4.6 times EV/EBITDA. In terms of profitability, Vodafone is the most profitable with a 13.44% operating margin, while the operating margins of Verizon Communications and Deutsche Telekom AG (ADR) (PINK:DTEGY) were 12.04% and only 8.87%, respectively. In terms of dividend payment, Deutsche Telekom AG (ADR) (PINK:DTEGY) pays the juiciest dividend yield at 7.9%. Vodafone Group Plc (ADR) (NASDAQ:VOD) ranked second with a 5.6% yield while the dividend yield of Verizon Communications Inc. (NYSE:VZ) is only 4.3%.
Hidden value in a 45% stake in Verizon Wireless
What is missing in all those numbers above is the potential value of Vodafone’s 45% stake in Verizon Wireless. A 45% stake in Verizon Wireless would equal £20.18 ($30.4) billion in revenue, £7.7 ($11.6) billion in adjusted EBITDA and £4.87 ($7.34) billion in net profit. David Einhorn, in the letter to shareholders, wrote that Verizon Communications, a 55% controlling owner of Verizon Wireless, had starved Vodafone by restricting Verizon Wireless from paying dividends for years. However, unlike Verizon Communications Inc. (NYSE:VZ), Vodafone Group Plc (ADR) (NASDAQ:VOD) did not rely on Verizon Wireless’ contributions. According to Deutsche Bank estimates, if Verizon Wireless is valued at 8 times EV/EBITDA, Vodafone’s stake in Verizon Wireless might be worth $120 billion. Therefore, at the current price, after excluding the value of the Verizon Wireless stake, Vodafone along is worth only nearly $12.7 billion.
Foolish Bottom Line
Vodafone seems to be quite cheap at the current price, thanks to its 45% stake in the growing and profitable cash cow Verizon Wireless. If Verizon Communications seriously considers a buyout for Verizon Wireless, Vodafone’s potential value would be unlocked immediately.
The article Is Vodafone Cheap Now? originally appeared on Fool.com and is written by Anh HOANG.
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