Recently I decided it was probably time for me to value and analyze each of the companies remaining in my portfolio from before I truly dedicated myself to learning and becoming a “true investor.” I had never valued any of the companies I am going to be writing about in the next several days. I have read at least one annual report and one quarterly report, along with a myriad of other articles about each of the companies in the time since I bought them, and I am going to offer my brief thoughts on each.
I am also going to decide if I should keep, buy, or sell any of the companies after determining if I think any of them are under or overvalued.
Vodafone Valuations and brief thoughts
Vodafone (VOD) valuations done on September 10th, 2012. Valuations in millions of GBP, except per share information, unless otherwise noted. Valuations done using 2012 10K.
Asset Reproduction Valuation
|Assets:||Book Value:||Reproduction Value:|
|Cash and Cash Equivalents||7138||7138|
|Short Term Investments||1323||1323|
|Accounts Receivable (Net)||3885||3302|
|Other Current Assets||3491||1746|
|Total Current Assets||20025||15603|
|Equity and Other Investments||35899||17950|
|Deferred Income Taxes||1970||1000|
|Other Long Term Assets||3482||1741|
Number of shares are 5096
- With intangible assets and goodwill: 69427/5096=13.62 GBP per share = $21.80 per share.
- Without intangible assets and goodwill: 45621/5096=8.95 GBP per share = $14.33 per share.
EBIT and Net Cash Valuation
Cash and cash equivalents are 7,138
Short term investments are 5,096
Total current liabilities are 24,025
Cash and cash equivalents + short-term investments – total current liabilities=
- -15,564/5,096=-3.05 GBP per share=-$4.78 in net cash per share.
Vodafone has an EBIT of 11,187.
5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:
- 5X=64,396/5096=12.64 GBP per share=$19.79 per share.
- 8X=97,957/5096=19.22 GBP per share=$30.09 per share.
- 11X=131,518/5096=25.81 GBP per share=$40.41 per share.
- 14X=165,079/5096=32.39 GBP per share=$50.71 per share.
Revenue and EBIT Valuation
|Average 6 year EBIT %:||15.87%|
|Estimated EBIT of:||7366.4|
|Assumed Fair Value Multiple of EBIT:||5X|
|Estimated Fair Enterprise Value of VOD:||36832|
|Cash, Cash Equivalents, and Short Term Investments:||8461|
|Estimated Fair Value of Common Equity:||10336|
|Number of Shares:||5096|
|Equals:||GBP 2.03 per share=$3.27 per share|
The $3.27 per share is my low estimate of value. My base estimate of value using an 8X multiple was $10.16 per share, and my high estimate of value using an 11X multiple was $17.25 per share.
Price to Book and Tangible Book Valuation
|Tangible Book Value:||102625.8|
|Industry Multiple Implied Fair Value:||174463.8|
|Assumed Multiple as a Percentage of Industry Multiple:||65%|
|Estimated Fair Value of Common Equity:||113401.5|
|Number of Shares:||5096|
|Equals:||GBP 22.25 per share=$35.62 per share.|
The $35.62 per share is my low estimate of value. My base estimate of value using a 95% multiple was $52.05 per share and my high estimate using an 125% multiple was $68.49 per share.
FCF and Cash Flow Valuation
|Operating Cash Flow:||12755|
|Free Cash Flow:||4903|
|Industry Median FCF Yield:||6.17%|
|Industry FCF Yield Implied Fair Value:||79465|
|Assumed Required FCF Yield As A % of Industry FCF Yield:||65%|
|Estimated Fair Value of Common Equity of VOD:||51652.25|
|Number of Shares:||5096|
|Equals:||GBP 10.14 per share=$16.23 per share.|
Vodafone’s FCF yield is 5.41%. The companies I used as comparisons are Verizon, China Mobile, and AT&T.
The $16.23 per share is my low estimate of value. My base estimate of value was $23.71 per share and my high estimate was $31.20 per share.
Vodafone’s debt ratios are as follows:
- Current assets to current liabilities: 20025/24025=0.83
- Total debt to equity: 34957/76935=45%
- Total debt to total assets: 34957/139576=25%
Brief Thoughts and Conclusions
Vodafone’s valuations are all over the place from a low of $3.27 a share to a high of $68.49 per share. My cost basis for VOD is $27.37 per share.
After looking at its margins, reading its annual report and all that I have read since buying into Vodafone, I would use either the 8X EBIT and cash valuation, $30.09 per share, or my low estimate of value in the price to book and tangible book valuation, $35.62 per share, as my estimate of intrinsic value. I would probably lean towards the $30.09 estimate of intrinsic value just to be safe, meaning that I think Vodafone is about correctly priced.
Knowing what I know now, I would not have bought into Vodafone when I did, or at this time, as it does not meet my minimum 30% margin of safety. Others reasons I would not buy into it at this time are:
- The high debt levels.
- Massive amounts of cap ex needed constantly.
- The problems that it has had in India and other countries lately
I do not think that Vodafone is a bad company by any stretch of the imagination, I just bought into them at too high of a price and for the wrong reasons; mainly its dividend.
I really like that it is a truly global company with some very good assets, including being a 45% owner of Verizon.
For now I am going to hold onto Vodafone until there is some kind of clarity from Verizon on its dividend payment strategy towards Vodafone, and/or until I find another company to buy as I think I will have a hard time making money at my currently too high cost basis in Vodafone, and I will possibly look to sell my stake in VOD when I find another attractive company.