One turnaround stock I'd sell to buy Vodafone Group plc
This year has been a positive one for Vodafone (LSE: VOD). The telecoms company has seen its share price rise by 10% and has made progress with its strategy. Although some investors may consider selling after such a gain in a relatively short space of time, the stock seems to have significantly more upside potential. In fact, it could be worth selling at least one of its industry peers in order to buy it.
Improving outlook
The company in question is designer, builder, owner and operator of fibre optic infrastructure in UK towns and cities, CityFibre(LSE: CITY). On Wednesday it said that it has now completed the acquisition of Entanet Holdings for a total consideration of £29m in cash.
The deal looks to be a good one for CityFibre. It will significantly increase its wholesale capabilities as well as its relationships with service providers. This will extend the company's channels to market. Through combining the fibre infrastructure with Entanet's established wholesale products, systems and relationships with Channel Partners, there are expected to be synergies of over £3m per annum within the next three years.
The effect of this on the company's bottom line is likely to be positive. However, it is still due to remain lossmaking in the current year and in 2018. Despite a potential for narrower losses versus prior years, other telecoms companies such as Vodafone may offer superior catalysts over the medium term.
A potent mix
In fact, Vodafone is expected to report a rise in its bottom line of 5% in the current year, followed by further growth of 20% next year. Given its size and diversity, this would be a stunning result and would show that its aggressive acquisition and investment strategy is starting to bear fruit. And since it trades on a price-to-earnings growth (PEG) ratio of just 1.3, it appears to offer excellent value for money at the present time.
As well as its growth potential, Vodafone also offers defensive characteristics. For example, it has far more geographical and product diversity than sector peers such as CityFibre. This means that a slowdown or difficulty in one part of the business could potentially be offset by strength elsewhere. It also means that the stock may be deserving of a higher rating versus riskier industry peers.
In addition, Vodafone also offers a dividend yield of 5.8% at the present time. Given its financial strength and diversity, the chances of dividends being maintained or increased in future seem high. With inflation moving up, this could give the investment a competitive advantage versus other high-yielding stocks in the FTSE 100.
Therefore, while CityFibre may have a degree of investment appeal after today's acquisition update, buying Vodafone seems to be a better move from a risk/reward perspective.
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Peter Stephens owns shares of Vodafone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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