OK, so you want a quality stock that offers growth. and value? Consider Vodafone (NYSE:VOD). Headquartered in Newbury, England, the world's leading mobile telecommunications company gives prospective shareholders predictability, sparkling accounts, and a market rating well below the S&P average. I reckon it's the just the type of opportunity that makes money for readers of Philip Durell's Motley Fool Inside Value newsletter service.
I'd recommend Vodafone for 10 reasons:
1. Simple and understandable. Everybody understands the advantages of owning a mobile phone. Indeed, the products and benefits of the telecom industry have been pretty obvious ever since Alexander Graham Bell called Thomas Watson in 1876.
2. Predictable, repeat business. Zillions of phone calls have to be made each day, every day, and their individual cost is low. This is one sector where ongoing revenues are predictable with a high degree of certainty.
3. World leader. Vodafone is an industry titan. With its American Depositary Receipts (ADRs) at $26.55, the company is worth $172 billion and would rank in the top 10 of the S&P 500. Operations span about 40 different countries, and the firm is typically the No. 1 or No. 2 player in each market (or it is associated with the market leader). The latest stats show Vodafone serving 152 million subscribers worldwide. A little-known fact is that Vodafone owns 44% of U.S. telecom giant Verizon (NYSE:VZ). Verizon is currently in a battle with Qwest (NYSE:Q) to acquire September Inside Value recommendation MCI (NASDAQ:MCIP). Success would further enhance Verizon's -- and consequently Vodafone's -- worldwide competitive advantage.
4. Obvious competitive advantages. Vodafone enjoys two substantial barriers to entry. First, government licenses to operate telecom networks are limited. According to the group's 2004 annual report, competitors in each of Vodafone's European, Asian, and African markets can be counted on one hand. Second, building telecom networks is expensive -- Vodafone's last balance sheet revealed tangible fixed assets totaling $34 billion. Operating margins of 30%-plus emphasize the strengths.
5. Fine record. Growth has been exponential since the 1988 IPO. In the 15 years to March 2004, annual revenues are up 140-fold (to $62 billion) and normalized pre-tax profits are up 120-fold (to $19 billion). Admittedly, growth has been fueled partly by hefty stock-based acquisitions -- earnings per share are up "just" 22-fold since listing. The rate of expansion has gradually slowed, but it is.
6. Still growing. There's still growth in the tank. Some 5.4 million net new customers were recruited in the final quarter of 2004 -- Vodafone's best three-month performance since 2000. Customer numbers are expected to improve by 10% in the year to March 2005 and by high single digits the year after. New 3G and multimedia services should also bolster the top line.
7. Super cash flow. With 60% of customers paying up front, Vodafone is a cash fountain. The half-year dividend was recently doubled, this year's final payout is set to experience a similar increase, and a $7.6 billion buyback program has just been completed. Another sizable buyback looks to be scheduled soon. And despite almost $10 billion of network capital expenditure, Vodafone still expects free cash flow for the year to March 2005 to come in at $13 billion.
8. Manageable debt. Vodafone is not at the mercy of its lenders. The most recent net debt figure was $16 billion, which compares favorably with annual operating profits of $20 billion. In fact, operating profits covered net interest payments 15 times in fiscal 2004.
9. No major pension worries. Unlike many British blue chips, Vodafone is not saddled with an onerous pension deficit. At last count, projected retirement liabilities exceeded the scheme's assets by only $195 million.
10. Cheap valuation. Analysts expect earnings to increase by around 8% to 9% in the year ending March 2005, putting the $26.55 ADRs on a price-to-earnings (P/E) ratio of 14.4. Similar forecast growth for 2006 reduces the P/E to 13.1. Furthermore, the prospective dividend yield is currently 2.9%, rising to 3.1%. And going on Vodafone's own cash flow forecast, the free cash flow yield is about 7.7%. Given that the S&P 500 trades on a P/E of 20 and yields 2%, Vodafone's rating and superior business characteristics offer a clear margin of safety.
What now?
In past issues of Inside Value, analyst Philip Durell has highlighted the long-term investment attractions of such household names as Colgate-Palmolive (NYSE:CL) and Mattel (NYSE:MAT). But while firms enjoying reliable demand, proven records, obvious strengths, and conservative finances -- such as Vodafone -- may seem boring, they do provide handsome rewards. In less than a year, Philip has earned his Inside Value readers around four times the return of the S&P 500.
Beating the market is not rocket science. Warren Buffett, for instance, has made a fortune by simply buying great companies at attractive prices and holding for the long term. Philip is on the same tack with Inside Value: hunting down quality operations that sport a sensible margin of safety. If you want to discover the identities of Philip's current recommendations, take advantage of a special 30-day free trial or, for a limited time, a 25% discount on an annual subscription.
Maynard Paton is an analyst for the Motley Fool UK Value Investor newsletter. Hedoes not own shares of Vodafone or any other company mentioned in this article.All figures are based on UK GAAP and translated at £1:$1.89. The Motley Fool isinvestors writing for investors.
