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After all these years, Vodafone still looks super cheap

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January 23, 2013 – Comments (5) | RELATED TICKERS: VOD

As a shareholder of Vodafone (VOD), I always keep my eyes open for news on the company.  The stock hasn't been doing particularly well of late, but one famous investor, David Eihnorn, still really likes its prospects.

Here's what Einhorn had to say about VOD in his latest letter to investors:

"We have also increased our Vodafone holdnigs, as the stock fell sharply on news that just doesn't seem that bad...At this valuation, it appears as though the market is placing no value on VOD's 45% stake in Verizon Wireless.  And the Verizon Wireless stake is clearly quite valuable.

Look at it from Verizon's (VZ) perspective: Historically Verizon had a very profitable landline business, and Verizon Wireless owed it billions of dollars.  Verizon received Verizon Wireless's free cash flow as it repaid the debt.  For years, Verizon used its control to try to starve VOD by refusing Verizon Wireless to pay dividends.  Today, Verizon's landline business generates no cash and the debt from Verizon Wireless has been repaid.  Verizon's 55% control stake in Verizon Wireless is probably worth more than all of Verizon's market capitalization, and Verizon has become wholly dependent on dividends from Verizon Wireless to fund its parent company obligations and shareholder dividends.

Excluding any contribution from Verizon Wireless, VOD stock pays a 7% dividend and trades at less than 12x cash earnings - roughly in line with other large European telecom companies.  Meanwhile, VOD has never become dependent upon Verizon Wireless distributions.  Given the huge valuation discrepancy between what the market thinks that Verizon Wireless is worth to Verizon (at least a couple hundred billion dollars) and what it ascribes to VOD (about zero), combined with Verizon's increasing dependence upon Verison Wireless, it wouldn't surprise us if Verizon decided to buy all of VOD to gain full ownership of Verizon Wireless.  It could decide to become a global telecom leader or it could spin out parts of VOD that it's not interested in owning.  Maybe there is an investment banker with time on their hands reading this letter. [courtesy of the great site, marketfolly.com]"

I have personally owned Vodafone stock for years on the thesis that Verizon Wireless would eventually begin to pay dividends to VOD, driving up the value of its stake and allowing it to raise its dividend or to pay a series of special ones.  For the most part this thesis has played out perfectly, but Vodafone's stock has not moves as much as I thought it would.  I'm sure that this is mainly a result of the issues with the European economy over the past several years and its languishing business in several countries.  Vodafone's tax issues in India may have also played a role. 

Either way, to give you an example how this trade has done, I went long VOD in CAPS ni April 2010 (and probably about the same time in real life). Since that date, including dividends VOD is up 34.87% versus a gain of 24.21% for the S&P 500.  I'll gladly take it, that amounts to outperforming the S&P by several percent per year during a bull market, but as I mentioned I was hoping for more.

As Einhorn mentioned in his letter to investors, I think that there's more gains to come with VOD and I continue to hold my stake.  I don't see how VZ would be able to buy all of VOD, to me that seems as though it would be like a snake trying to eat a goat, but I suppose that anything is possible.  I could certainly se VZ paying VOD a pretty penny for its share of Verizon Wireless. 

Thanks for reading everyone.  Have a great evening!

Deej

5 Comments – Post Your Own

#1) On January 23, 2013 at 5:43 PM, Mega (99.95) wrote:

Any idea what look-through earnings, cash flow and book value are? Is VZW a black box or can you figure that out?

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#2) On January 24, 2013 at 4:47 AM, ikkyu2 (99.32) wrote:

When I last looked I was astonished by the level of indebtedness.  The stake in Verizon is also encumbered by a huge amount of debt.  These are mature utilities but they are not monopolies, like an electric utility - they are regulated somewhat but vulnerable to all kinds of competition in their core businesses, as well as technological disruption.

But they're indebted like an electric power plant and pay dividends like one too.  That makes me nervous. 

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#3) On January 24, 2013 at 12:10 PM, Option1307 (29.72) wrote:

I have always been intrigued by your VOD pitch and with the recent fall in share price I think I may need to take another look.

+1

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#4) On January 24, 2013 at 2:56 PM, ElCid16 (93.74) wrote:

I'm not sure I can look at Einhorn the same way after GMCR and MRVL.  It blows my mind he never made any money on his GMCR short.  And the folks over at Footnoted saw the $1B MRVL patent case from a mile away - did Einhorn even have a clue?  He was buying all the way up through the end of October.

Maybe he's not as good at "reading between the 10-K lines" as he thinks he is.  Then again, maybe I'm just being too critical...

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#5) On March 05, 2013 at 2:44 PM, Option1307 (29.72) wrote:

http://www.thestreet.com/_yahoo/video/11860373/verizon-sick-of-wireless-bill.html?cm_ven=YAHOOV&cm_cat=FREE&cm_ite=NA&s=1

No serious talks are in the works, but nice to know both parties are headed in this general direction. I wouldn't be opposed to Verizon buying out the Verizon wireless stake from vod. At a nice premium of course!

 

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