LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "growth at a reasonable price," or GARP, strategy. This theory uses the price-to-earnings to growth ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.
Today I am looking at Vodafone (VOD -0.40%) (VOD -0.34%) to see how it measures up.
What are Vodafone's earnings expected to do?
| Metric | 2014 | 2015 |
|---|---|---|
| EPS Growth | 3% | 7% |
| P/E Ratio | 11.2 | 10.5 |
| PEG Ratio | 3.3 | 1.6 |
Source: Digital Look.
Vodafone is expected to keep earnings per share ticking higher in the year ending March 2014, following the similarly marginal improvement to the tune of 5% punched in 2013. Earnings growth is forecast to pick up slightly in 2015, according to City brokers.
EPS increases in these years are not meaty enough to leave the company within PEG bargain terrain below 1. And on a price-to-earnings basis, Vodafone is expected to trade above the generally regarded benchmark of 10, although the firm does not trade stratospherically above this measure. A reading under 10 is widely considered to represent decent value.
Does Vodafone provide decent value against its rivals?
| Metric | FTSE 100 | Mobile Telecommunications |
|---|---|---|
| Prospective P/E Ratio | 14.9 | 14.3 |
| Prospective PEG Ratio | 3.1 | 4.8 |
Source: Digital Look.
Vodafone beats both the FTSE 100 and mobile telecommunications sector averages in terms of forward P/E ratio, and comfortably surpasses the latter group in terms of prospective PEG multiple. The firm lags the FTSE 100 when considering the PEG reading, however.
Although Vodafone's PEG metrics undermine its candidacy as a classic GARP stock, I believe that the company carries the clout to turbocharge earnings expansion over the medium to long term.
Time to get yourself connected
Vodafone announced in May that operating galloped 9.3% higher in 2013 to 12 billion pounds, despite a 4.2% turnover decline to 44.4 billion pounds. Difficulties in Europe, caused by pressure on consumers' wallets and fresh regulatory problems, hampered performance during the 12 months to March. But better EBIDTA margins, particularly in developing regions, signaled the operational improvements that the company has made over the course of the year.
While organic growth, particularly in emerging markets, continues to tick along at an encouraging pace, Vodafone also has the scope to supplement this through lucrative M&A activity. The firm is currently in discussions to acquire German cable giant Kabel Deutschland in a bid to bolster its European customer base and improve its product catalog by delivering television, broadband, and mobile and fixed-line telephone services.
And the company's cash situation could be given a shot in the arm, along with its expansion plans, should it decide to sell its 45% stake in Verizon Wireless to Verizon Communications.
As well as providing decent growth qualities, the mobile operator is also favored by those seeking reliable and chunky income stocks. The firm is expected to build the full-year payout again in 2014 to yield a stonking 5.7%, according to forecasters.
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