Vodafone Upgraded to Outperform

We are upgrading our recommendation on Vodafone Group Plc (VOD), the largest revenue generating international wireless carrier, to Outperform from Neutral on account of strong revenue growth and upbeat outlook for future years. Currently, the stock has Zacks # 1 Rank (Strong Buy).

Earnings and revenues were stronger in the first half of 2010 than the year-ago period, driven mainly by solid performance in all regions except Europe. Almost half of the revenue growth was organic and came largely from emerging markets.

Vodafone is looking for expansion opportunities in emerging markets such as Europe, India and Africa through the adoption of mobile data. The company rolled out its new growth strategy in these markets following the recent surge in demand for smartphones.

Vodafone continues to invest further in its European network and develop data networks in Indian and African markets. The company will transition its data pricing plans to tiered plans and differentiated service levels. Vodafone expects smartphone sales in Europe to grow from the current 32% to more than 70% by 2013. Additionally, Vodafone is expected to benefit from its ongoing cost reduction program (£1 billion) in Europe by 2013.

Vodafone also pursues selective expansion in the enterprise market and growth opportunities in the machine-to-machine and financial services sectors. In Europe, the company plans to continue its capital efficient approach. This new growth strategy is expected to generate organic service revenue growth in the range of 1% to 4% per annum and free cash flow in the range of £6.0 billion to £7.0 billion over the next three years (2011–2014).

Over the same period, Vodafone expects EBITDA margins to stabilize, with continued cost efficiency, regional scale and improving margins in various markets including India.

Vodafone is trying to exit minority holdings. The company plans to sell securities in the Japanese wireless operator Softbank Corporation for £3.1 billion ($5 billion) in November.

In September, Vodafone also announced the sale of its entire 3.2% stake in China Mobile (CHL) for £4.3 billion ($6.6 billion). Vodafone is reviewing all its minority holdings including a sale of 25% stake in Poland’s Polkomtel, a 44% stake in SFR (a French joint venture with Vivendi) and a 45% stake in Verizon Wireless. Verizon Wireless is a venture between Verizon Communications (VZ) and Vodafone.

Further, the company is also focused on improving shareholder returns through attractive dividend payouts, supported by healthy free cash flow. Vodafone targets 7% per annum dividend per share growth policy over the three-year period (2011–2014) and expects total dividend per share to be no less than £0.1018 for FY13. Accordingly, the company raised its interim dividend by 7.1% to £0.285 per share.

VODAFONE GP PLC (VOD): Free Stock Analysis Report

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