I’ve lengthy been arguing that the Vodafone (LSE:VOD) share price underestimates the true worth of the telecoms group. Nevertheless, no one seems to have been listening!

Nicely, possibly issues are beginning to change. That’s as a result of since 4 February, when the share price closed at 65.1p, it’s risen 16.1% to 75.6p (at lunchtime on 21 March).

Though I’m a shareholder, I attempt to take a dispassionate view. There’s no level attempting to child myself if I do know – deep down – that I made a mistake after I purchased the inventory. As Warren Buffett famously as soon as stated: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

However no matter metric I exploit, I at all times come again to the identical conclusion. Specifically, that Vodafone’s market cap (presently £19.2bn) doesn’t precisely replicate its underlying worth.

Crunching the numbers

Take earnings for example.

The common historic (trailing 12 months) price-to-earnings ratio of 206 listed telecoms firms is 12.6. For the 12 months to 30 September 2024, Vodafone’s primary earnings per share from persevering with operations was 8.87 euro cents (7.43p at present trade charges). If the group was valued in keeping with the sector common, its shares would presently be altering fingers for 93.6p. That’s a premium of 23.8% to at present’s price.

It’s the same story when the group’s steadiness sheet is taken into account. Utilizing its newest revealed accounts at 30 September 2024, Vodafone’s price-to-book (PTB) ratio is simply 0.38. For comparability, its closest rival on the FTSE 100, BT, has a PTB ratio of 1.3.

Lastly, I consider the latest transaction by the corporate helps my argument.

In January, Vodafone bought its Italian division for 7.6 instances adjusted earnings earlier than curiosity, tax, depreciation and amortisation, after leases (EBITDAaL). Analysts are predicting EBITDAaL of €11.02bn (£9.24bn) for the yr ending 31 March 2025. Valuing the group on the identical foundation would indicate a inventory market valuation of over £70bn. Lowering this by the group’s debt would nonetheless recommend its present market cap is method under its intrinsic worth.

Issues to beat

Nevertheless, regardless of my perception that it’s undervalued, the group continues to face some challenges.

Because of a legislation change regarding the bundling of contracts, it’s shedding home prospects in Germany, its largest market. And its debt stays on the excessive aspect — telecoms infrastructure doesn’t come low-cost. Competitors within the sector can also be intense.

Sceptics may additionally level out that the corporate’s share buyback programme is behind the share price enhance, slightly than a change in investor sentiment. The corporate’s purchased simply over 406m of its personal shares for the reason that begin of February, lowering the quantity in circulation by 1.6%. I’m positive this can have had some affect on the price however I don’t assume it explains the entire latest enhance.

Calm down!

But regardless of the latest share price rally, I’m not getting too excited. A have a look at the group’s five-year chart exhibits that we’ve been right here earlier than. Many instances, in truth.

At the very least it’s been trending in the suitable route for the previous six weeks or so. I’m subsequently going to carry on to my Vodafone shares, hoping that extra traders will quickly worth the inventory as I do.