The Vodafone (LSE: VOD) share price fell 5.6% last week, reversing a good chunk of the gains it had made this year. That means a share in the telecommunications titan costs just 72p.
That looks cheap. Five years ago, I would have forked out 129.9p. A decade ago, I’d have paid 191p. At the peak of its powers during the dotcom era, a share cost 452.1p!
You get the gist. Today, Vodafone seems like an absolute bargain. But is that really the case?
Valuation
One of the easiest ways to decipher this is to look at its price-to-earnings (P/E) ratio. It currently sits at 19.1. That’s above the FTSE 100 average of 11, suggesting that the stock doesn’t present great value right now.
Its forward P/E for 2024, which works off its forecast earnings, is 14.9. That’s slightly cheaper, but it still doesn’t scream bargain.
My concerns
My main worry stems from looking at its balance sheet. It has €33.2bn in net debt on its books. That’s a concerning amount. High interest rates certainly won’t help in paying it down either.
On top of that, I’m concerned about its sliding share price. In the last five years, the stock has lost 44.6% of its value. Could it be Vodafone is just a value trap? Over the same period, the Footsie is up 12.4%.
Add to that the fact that Vodafone has had a real challenge in growing its top line in recent years, and I’m put off from snapping up any shares, even if at 72p they look cheap.
Balancing the books
That said, the business is trying to balance its books by trimming some fat. It has sold its Spanish business for €5bn while it looks set to part with its Italian business for €8bn.
On the back of that, alongside using the funds to reduce its debt, it recently announced a €2bn share buyback scheme. There are rumours that a further €2bn buyback programme is set to be revealed soon. That could keep shareholders happy for the time being.
These moves feed more widely into its turnaround strategy. We’re seeing positive signs from this already. There are other aspects that excite me about the firm, such as its growing African business.
I’ll be avoiding it
Vodafone is a stock I’ll be avoiding for now. Its share price dip is tempting, but I see better options out there on the Footsie for me.
That said, if the stock keeps falling, maybe it’ll become too cheap to ignore. After all, I see signs of promise with Vodafone, so I’ll be keeping it on my watchlist for the time being.
Its debt is my main concern and I want to see what further steps it plans to take to reduce it going forward. It has ambitious growth plans, but I’m conscious the massive pile could hinder them. Its falling yield, which is set to be cut in half next year, is another issue I have with the stock.
This post was originally published on Motley Fool
