Despite a huge run-up in the stock following the sale of Verizon Wireless, Vodafone (NASDAQ:VOD) still offers a lot of value to shareholders. The stock has long been associated with the 45% investment in the successful American wireless company, but Vodafone has a whole European business to offer investors that is often overlooked.
Though Vodafone can be difficult to value considering all the moving parts with the deal, it appears one can value the company based on removing the assets being returned to shareholders and the forecasted free cash flow for the remaining businesses in 2014. The valuation might surprise investors considering the large run over the last few months based on the $130 billion offer from Verizon (NYSE:VZ).
One key to the investment equation is the shift in growth opportunities in Europe while the U.S. market matures. Is it possible that Vodafone is cashing out of the U.S. market at peak valuation?
Smartphone Penetration Rates
For those not paying attention at home, the market is all about buying low and selling high. It is pretty hard to argue that Vodafone didn't do an excellent job of selling high by claiming $130 billion for a minority stake in Verizon Wireless. Note that AT&T (NYSE:T) is only worth $180 billion on its own and this deal places an incredible valuation of $288 billion on Verizon Wireless. Evidently AT&T should immediately sell off all non-wireless assets and the stock price might soar 50%. Not too surprisingly, the company recently dumped the wireline assets in Connecticut to Frontier Communications so maybe it is on that path.
The buy low part of this deal for Vodafone is the European and possibly Asian assets that it can now purchase with a balance sheet void of debt. Considering most cable and telecommunications providers have huge debt loads, Vodafone has a big leg up on the competition. Not to mention, Europe has spent the better part of the last four or five years in a major recession, the assets in Europe are depressed especially considering the cash flows and earnings have been held back on economic weakness on the continent. One of the best examples of the potential for Europe playing catch up is the smartphone penetration level in each country. According to Vodafone, its top markets of U.K., Germany, and Netherlands only have a penetration rate of 39%.
As well, Vodafone sits in a good position with a strong asset base in several key markets that are ready for 4G services per the recent presentation.
The real interesting part about the Vodafone forecast for 2014 is that the company expects to generate very solid free cash flow figures. At the high end, the roughly $8 billion forecast would provide for a valuation that makes the stock very attractive compared to the domestic players of AT&T and Verizon.
Using the enterprise value metric considering the vast differences in debt levels, Vodafone compares very favorably to the domestic wireless majors. With an estimated market value of around $96 billion after $84 billion worth of assets returned to shareholders, Vodafone could trade as low as 11x FCF. The below chart highlights the attractive valuation that doesn't even factor in the potential for the European markets to generate higher growth in the next few years.
Even with the huge run over the last year, Vodafone appears set to outperform the domestic wireless providers. The expected rebound in the major economies in Europe plays right into the recent investment path of Vodafone. Investors should stick with this stock and move out of the stocks tied to the mature U.S. wireless markets.
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