On Jun 13, 2014, we issued an updated research report on Vodafone Group Plc (VOD). In fiscal 2014, both the company’s top and bottom line registered year-over-year declines owing to lower adjusted operating profit that can be attributed to a challenging European economy and rising regulatory and competitive pressures. Currently, the Zacks Consensus Estimate for fiscal 2015 earnings is pegged at $1.62 per share, representing a decline of 45.1% in annualized earnings growth.
Vodafone met its adjusted operating profit guidance of £5 billion in fiscal 2014 along with the free cash flow projection of £4.8 billion, driven by increased mobile data services, growth in enterprise markets through converged fixed and mobile services (Vodafone One Net), and introduction of pricing plans such as Vodafone Red. Based on expectations of significant benefits from investment and subscriber growth, going forward, the company projects EBITDA in the range of £11–£11.9 billion and positive free cash flow for fiscal 2015. The company is banking on expansion in emerging markets including Eastern Europe, India and Africa, and growth in machine-to-machine, near-field communications for improved profits and competitive edge against peers like Telef (TEF).
Vodafone is way ahead of its competitors in 3G and Evolved High Speed Packet Access (HSPA+) networks and India remains one of the key markets for 3G growth given the rapid increase in data consumption in the country. India 3G's traffic now represents 16% of the AMAP total. The country is the second biggest data market in the world holding room for future growth. Further, the company is accelerating its 4G expansion and covers 13 countries across both Europe and AMAP with 2 million customers. On Feb 18, 2014, the company announced that it will eventually roll out the world’s largest 4G roaming network in 18 countries.
Vodafone’s core European wireless markets are well matured, given the high subscriber penetration rates. However, over the next two to three years, the company will likely have to struggle to counter declining voice revenues. Like the other leading carriers across the globe, Vodafone is not impervious to the existing soft economic conditions. Demand for the company’s products or services in the key European markets have been negatively affected by recessionary factors, as evidenced by the organic decline in service revenues. Lower revenues are, in turn, contributing to margin erosion in key European markets.
Further, weak economic conditions have compelled consumers to switch to cheaper alternative services offered by Vodafone’s competitors. This will likely mar the company’s future performance. In addition, Vodafone expects effective tax rate in the high 20s in fiscal 2015. To add to the woes, the average cost of debt is expected to increase to above 6%, despite retiring U.S. debts, as debt composites in emerging markets like India are moving up. Further, an estimated cash outflow of £6 billion pertaining to the proposed acquisition of Ono is also expected to negatively impact fiscal 2015 earnings.
Vodafone currently has Zacks Rank # 3 (Hold).
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