Are Vodaphone plc shares a bargain today, or one to avoid?

Vodaphone plc

[VOD] Vodaphone plc shares are currently sitting at a very low and affordable £1.24 at time of writing. An enticing entry price for the FTSE 100 telecommunications giant. But does the company meet the criteria for the CLEAN Watchlist? And should we be looking for long signals on our mechanical systems?

Well, i’m all about the facts and not the opinions. And the numbers are factual.

Over the last 11 years going back to and including 2008, the company have been achieving a gross annual profit margin of about 30% which is acceptable but doesn’t meet the standards of a CLEAN Watchlist company unfortunately.

Expenses are volatile at [VOD] Vodaphone plc. One year coming in at around 50% of their gross profit. Other years reaching 83%. I don’t like volatility in expenses, as they can eat profits and result in falling net earnings. This in turn often leads to a drop in share price. Not ideal for long signals.

This is precisely why consistency is a factor when assessing whether a company makes the CLEAN Watchlist or not. A lack of consistency can almost guarantee a failure to make the grade.

Erratic numbers

On top of this [VOD] Vodaphone plc have some erratic depreciation costs in their financial statements. Some years costing them 40% of their gross profits. Other years as high as 67%. This is very very high. To lose 67% of your gross profits on depreciating assets is excessive and not a sign of a company I’d be keen to trade.

Interest on debt is also astronomically high. In fact, in 6 out of the last 11 years their interest on debt has been greater than their operating profits. Resulting in a net loss before tax.

Why hasn’t this shown up on the financials? Because of extraneous income. Other income which does not form part of the recurring business. Income from investments and from associates. Not income from the bread the butter of what they do. This is what has made the books look healthier than they are.

But I’m not interested in that income. When i’m assessing a company I assess them based on their recurring revenue. Revenue they make year on year. Not one off sales or investments that have paid off.

And when you omit the extraneous income, a £657 million profit posted in 2013 turns into a £5.3 billion net loss.

Its this homework that allows us to uncover the true performance of [VOD] Vodaphone plc. The big investors know this. The ones who move all the shares around. How do we know? Because demand for these shares has dried up.

Since 2013 the share price has fallen from £3.00 to £1.24. The big investors aren’t putting their money in Vodaphone, and neither am I.

Not for Shorting

Don’t get me wrong. [VOD] Vodaphone plc are a huge company and they’ll be ok. £43 billion revenue in 2019 for starters. Although they have been declared by Ofcom as the worst company for broadband complaints in 2019 which is also not a good sign.

One of my clients yesterday asked me why we don’t short these companies who fail to make the list. But a good company failing to make the list is not the same as a failing company. They are just not good “enough” for the watchlist. I’m ONLY looking to buy/spreadbet companies that are the best of the best in terms of financial performance. This means they have to tick all my boxes. I have set high expectations, not just on raw numbers but on patterns and consistency.

It doesn’t mean you can’t make money on Vodaphone. It just means my data shows that there are better options on where to put your money. Companies with better odds of a rising share price over the next 1, 2 or even 10 years.

There is better on offer

[VOD] Vodaphone plc simply don’t make it into my watchlist because of the erratic nature of the financials. Expenses and depreciation are all over the place. Some years costing them all their profits. They’re posting net profits but behind the scenes much of this is attributed to one off non-recurring profits. When omitted the results look far uglier. A net loss of £2.9 billion in 2019 for instance.

Based on my analysis, and my hard/fast rules for stock selection, my data shows me that there are better places to put your money in my opinion.

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About Chris Chillingworth

Self confessed lover of racing, american football and whiskey. Trader and Investor since 2011. Chris has now coached over +1500 traders using his mechanical systematic trading strategies and now also runs a members only watchlist of FTSE stocks.

View all posts by Chris Chillingworth

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