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Federico Flom
Federico Flom
Articles (110) 

Vodafone (VOD) - Lots of Gurus Are Watching This High-Quality Stock

December 30, 2011 | About:

Vodafone (NASDAQ:VOD) is the second-largest wireless phone company in the world behind China Mobile (CHL). It has 361 million proportional customers, including its 45% stake in Verizon Wireless (VZ).

It is also the largest carrier in terms of the number of countries served. Vodafone has majority or joint control in 22 countries and minority or partnership interests in many others. Its mandate is to become the communications leader across a connected world.

Regarding the countries where it operates, it is worth mentioning that Europe, Turkey and Germany are doing quite well. However, the PIIGS countries — Portugal, Italy, Ireland, Greece and Spain — are making margins suffer as austerity will likely continue to impact consumers there.

Europe, with 130% penetration today, is the most mature wireless market in the world. It is followed by the United States with 103% penetration as of March 2010.

Vodafone is an interesting pick. Its scale and scope around the world has provided cost advantages as programs can be developed in one market and then fitted into the rest at minimal additional cost.

In addition, the company generates significant free cash flow, with which it is trying to increase dividends, make acquisitions and reinvest in the business.

Vodafone's 45% stake in Verizon Wireless is estimated to be worth up to $75 billion.

Vodafone has developed M-Pesa, allowing money to be transferred via cell phone for emerging-market customers who don't have bank accounts.

Prominent gurus hold VOD; for example, Soros, Tweedy Browne, Brands and Gabelli increased their position in the stock in the last quarter, while few managers decreased their position and when they did, the percentage was low.


With Vodafone, the dividend is considered to be quite healthy. Indeed, in the past five years, VOD has paid dividends that have grown annually by over 11%

Management expects to maintain the 55% payout ratio and keep growing the dividends. VOD has a stable and predictable business so I think that the dividend is quite safe and stable.

While I like to stock, Vodafone is suffering from competitors. Furthermore, it has a long history of overpaying acquisitions. The firm still carries GBP 49.7 billion of goodwill on its balance sheet, a point that makes me feel quite unconfortable because it artificially boosts its BV. Its intention to gain full control of its Italian operation and to make other acquisitions poses the risk of overpayment. In addition, the Indian government claims Vodafone owes $2.5 billion in taxes for its acquisition of Hutchison Essar in 2007.

Least but not last, many of the firm's businesses are subject to political, economic and currency risks.

Anyway, Vodafone's last quarter results have not been dramatic. The company has begun to sell minority stakes to reduce its debt and carry out stock buybacks.

The firm also generates large amounts of free cash flow, which should enable it to handle its interest payments. If it needed to, Vodafone could reduce its dividend to meet its interest payments.

In the latest report group service revenue grew 1.5%. Vodafone continues to perform well with data, up 25%, driven by smart-phone penetration; fixed, up 6%; and AMAP, which mainly covering emerging markets, up by 8.7%. They also saw continued good growth in messaging, up 5%.

“Overall, another quarter of good commercial performance in what remains a challenging macro competitive and regulatory environment. Revenue growth remained strong in data and in emerging markets, we're driving smartphone penetration across our customer base and delivering growth in markets such as India and other Asian countries,” said Vittorio Colao, CEO.

In terms of valuation, my fair value estimate range has moved from $26-28 to $29-31. A slow economy recovery is expected in Europe, but it will be offset by stronger growth in Asia and the Middle East.

There are also increased EBITDA margin assumptions. The end of price warns in India will definitely boost margins.

The increased customer acquisition and retention costs are still squeezing margins in Europe as the firm attempts to offset the slowdown in revenue growth.

Mr. Colao continued: “…Looking forward, the prospects for data, we are convinced, remain strong given the low penetration in key growth segments such as prepaid, but also emerging markets.”

A more reasonable earnings multiple of 11-12x for Vodafone implies a $31 to $34 valuation range. That, together with 8% dividend yield for 2012 would imply upside of 24%-27% over the next year to 18 months.

A company with a steady performance must be accompanied by good management. In the case of Vedafone, Vittorio Colao replaced Arun Sarin, who retired, as CEO after previously serving as CEO of Europe and deputy CEO for Vodafone.

John Bond became chairman in July 2006 after a distinguished career at HSBC.

Most of senior management has come up through the ranks or from firms Vodafone has acquired. Vodafone's corporate governance is good.

About the author:

Federico Flom
Equity Research Analyst

Rating: 3.4/5 (12 votes)


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