BERKO: Bright Predictions for Vodafone Come With a Caveat

Listen to this article

Dear Mr. Berko: Is Vodafone, at $19.25, paying $1.70 and yielding 8.8%, a good buy? The stock is trading down from $30 last year. I like the income and can afford 1,000 shares.

What about Endo International, a drug company that in 2013 and 2014 traded in the high $90s? I bought 600 shares at $16 in 2008, selling them two years later at $35. Later I bought 400 shares at $26, selling them a year later at $49. Are 3,000 shares of Endo at $10 a good speculation to $30? — K.J., Vancouver, Washington

Dear K.J.: Vodafone (VOD), now $18, is a huge, international mobile telecommunications company with 256 billion shares outstanding, 550 million mobile customers in 25 countries and a home office in England, where King Arthur and Merlin once ruled.

Vodafone’s former CEO, Vittorio Colao, who has the people skills of a cobra, stepped down last year after 10 years at VOD with it trading at $30. However, when Colao assumed the reins at VOD in 2008, the shares were trading at $40. In all fairness, between 2011 and 2013, VOD traded between $60 and $72, and net profit margins ranged from 19% to 22%. During the following five years, VOD imploded.

Revenues, which were $74 billion, collapsed to $51 billion last year. Earnings topping $8 a share six years ago crumpled to $0.85 in 2018. The dividend, once $8.15 a share, was pulverized to $2.67, and the all-important net profit margins, once 19%, plummeted to 4.4%. What a bleeding mess.

Colao was baffled as he and his inept toadies watched VOD rot and its metrics disconnect. Last year Colao didn’t even blink when VOD recorded its lowest revenue volume in 15 years. VOD became Peck’s bad boy on Wall Street and Fleet Street, and the board finally told Colao to take a long walk off a high alp. Nick Read, who has been with VOD and held numerous positions since 2001 and has solid credentials, was promoted from CFO to CEO last December.

The only reason VOD shares crashed was stinky, wretched, abominable and beastly decision-making by Colao and his chums, some of whom, I hope, walked off that alp with Colao. Today, many on the Street (Merrill Lynch, Citigroup, UBS, Reuters, Argus, S&P, Oppenheimer, Morgan Stanley and JP Morgan) have solid buy recommendations on VOD. Even Value Line believes the “long term capital gains potential is ‘much’ above the Value Line median,” and reckons VOD could trade at $55 anytime between 2021 and 2025.

During the coming five years, analysts who follow VOD expect its earnings to grow at an average annual rate of 7.15% to 7.75%. This year, earnings should come in at $1.33 to $1.39 and could run to the $2.10 level by 2022. And the exceptional dividend of $1.70 at VOD’s current trading price yields 9.1%. Please be mindful that VOD’s significant cash flow allowed its inutile board of directors — there’s a lot of rot there that must be addressed soon — to pay dividends in excess of earnings.

Endo International (ENDP), now $7.75, came public in 2000 with an IPO managed by Smith Baloney and Bear Stearns and was among the darlings of Wall Street as revenues and earnings set glorious records in 2014 and 2015. ENDP’s most profitable offering is Opana ER, an opioid painkiller that I thought was a toothpaste! But Opana became a love fest among Hollywood celebrities.

I wouldn’t touch ENDP with a fire hose. It’s being sued across the Seven Seas via high-profile lawsuits for contributing to the opioid epidemic. Many Americans take opioids for thrills. When they “overthrill,” they hire lawyers to sue the product makers rather than take personal responsibility. Because of ENDP’s small size ($1.8 billion), the courts could award damages, and a conviction would bankrupt the company. Good idea, but bad timing.

(Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected].)