Troubled Vodafone shares are a steal

A couple of weeks ago, Vodafone (VOD, 126p) announced that its sales growth and profits will fall as its Japanese division soaks up the cash it needs to fight off competition from NTT DoCoMo from the rest of the firm.

Since the warning, Vodafone has published its interim results, making the damage clearer. Earnings per share fell from 5.40p to 4.36p, while pre-tax profit was down £400m to £4.1bn. But at the same time, Vodafone increased its share buyback target by £2bn to £6.5bn, and increased the dividend by 15%.

Still, investors seem only to have noticed the bad news: Vodafone shares are now trading at a 10% discount to their 2005 average so far, something that Andy Macdonald, writing in Shares, thinks makes them look an "attractive buy".

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Chief executive Arun Sarin has said he is committed to the Japanese division, "and will continue to invest in acquiring customers there" and has also said that he will continue to chase attractive acquisitions to drive growth. Meanwhile, other markets such as the core European ones are delivering solid growth. And then there is 3G, which is expected to increase customer spend, pushing margins higher. Already, 3G accounts for 7% of Vodafone revenues, says Heather Connon in The Observer. That's a healthy slice of revenue, given that the group has just five million 3G customers, less than 3% of its worldwide total of 171 million.

Sarin's worth putting money on, says Connon: the abrupt disposal of Vodafone's Swedish business (the regulatory regime made doing business there unprofitable) shows he "will not flinch from taking hard decisions". Moreover, the sheer size of Vodafone its market capitalisation is more than £80bn means that it can take advantage of growth, anywhere in the world, either by expansion or acquisition. On a p/e of about 12 for next year, it looks like a "steal", says Macdonald. "Canny investors who snap up a stake" at today's price "may well rake in a tidy pile of cash": according to analysts, the shares are worth between 150p and 160p in the medium term.