Think the Vodafone share price is a bargain? Read this now

While the FTSE 100 has disappointed investors in recent months, the performance of the Vodafone (LSE: VOD) share price in the last six months has been even worse. It’s fallen 31%, with investor sentiment coming under severe pressure. At the same time, the FTSE 100 has experienced a more modest decline of 6%.

Looking ahead, there could be further uncertainty for the company, with investor sentiment only increasing pressure. But with improving earnings growth potential and what seems to be a low valuation, it could offer value investing appeal alongside another stock which released a positive update on Tuesday.

Strong performance

The company in question is online service provider for trading Contracts for Differences (CFDs), Plus500(LSE: PLUS). It released a third quarter trading update that showed strong momentum, although revenue declined by 14% to $100.1m versus the same period of the previous year. This was due to relatively low levels of volatility, as well as the inclusion of two months of trading following the implementation of new regulations.

Encouragingly, market volatility has increased since the end of the period, and the company now anticipates that there will be an improvement to its performance in the fourth quarter. In fact, it’s now guiding the market towards improved guidance for the full year, which could help to improve investor sentiment in the short run.

With Plus500 having a price-to-earnings (P/E) ratio of around 8, it seems to offer a wide margin of safety. Certainly, there could be further challenges ahead under new regulations, but with strong momentum and what appears to be a low valuation, its long-term return potential appears to be improving.

Dividend potential

As mentioned, the Vodafone share price has fallen heavily this year. Investors seem to be concerned about its financial prospects following the acquisition of Liberty Global’s cable networks in Germany and Eastern Europe. Debt levels are due to increase, and this could limit the company’s scope to invest in future growth projects, as well as hurt its dividend growth potential.

In fact, there’s a risk that dividends could be cut. It seems as though investors are pricing in this possibility, with the stock now having a dividend yield of over 8% following its share price fall.

If dividends are cut, it could help the business to invest in future growth opportunities. Certainly, it would mean a lower income for investors, but if it means a stronger business that is more capable of delivering organic growth then it could prove to be a good move. And with the stock market seemingly expecting a dividend cut, it may not affect the company’s valuation as much as would normally be the case for a dividend reduction.

With Vodafone forecast to post a rise in earnings of 15% next year and it trading on a price-to-earnings growth (PEG) ratio of around 1.2, it seems to offer good value for money. While unpopular, it could prove to be a strong performer in the long run.

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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.