2023-11-09 15:28:21 ET
Summary
- Vodafone's stock price has dropped to $9.50, with analysts recommending a hold and Wall Street recommending a strong buy.
- The bear case on Vodafone is centered around stagnant revenue and a potentially at-risk dividend.
- However, I believe that Vodafone is a steal at its current pricing due to management's turnaround plan and depressed valuation multiples.
I'm revisiting my Q3 2023 thesis on Vodafone ( VOD ) in advance of first half 2024 earnings, which will be released pre-market on Tuesday, Nov. 14.
In Q3, at $12, I rated Vodafone a buy for the following reasons:
- New CEO Margaret Della Valle was making quick strategic pivots in the business.
- Financials were improving with $500 million of cost savings identified and ARPU improving in key markets.
- Based on valuation multiples, the stock price appeared to have bottomed out.
Today, Vodafone sits at $9.50 with the quant rating and my fellow analysts recommending a hold, while Wall Street recommends a strong buy.
VOD Rating (Seeking Alpha)
The bear case on Vodafone centers around stagnant revenue, putting the dividend (currently yielding over 10%) at risk. Cassiopeia Value Investing covered these points well in an October article. Certainly, this is true on the surface, and I understand where the bears are coming from. Vodafone can't seem to get traction on revenue.
And Vodafone gets a D for dividend safety, with a concerning payout ratio of 160% and a coverage ratio of 63%.
However, I'm with the bulls on Wall Street in believing that Vodafone is a steal at the current pricing as management's aggressive turnaround plan starts to bear fruit and valuation multiples are significantly depressed. While it may take a few quarters to play out in the stock price, I recommend grabbing the double-digit dividend yield while you can.
Turnaround Is Slowly Yielding Results
As discussed above, Vodafone doesn't look great on the surface. Revenue hasn't gotten any traction, and Germany, the largest market, is struggling.
Fortunately, management has acknowledged the challenges and is aggressively pursuing a turnaround plan. Here's a recap of the plan that management shared in the year-end earnings package:
Starting with the first point, Vodafone has made significant strides in growing its footprint with businesses. As of Q1 2024, Vodafone had three consecutive quarters of accelerating growth in business, has grown digital services, and has room to grow as the market expands at 11% per year.
On the third point, Vodafone has identified more than $500 million in cost savings on its way to a $1 billion target and restructured the organization's shared services, including 11,000 layoffs.
And on the fourth point, Vodafone has made significant moves to right-size the portfolio. In June, Vodafone announced a merger with CK Hutchinson to lock down market position in the UK. And last month, they announced a deal to offload the underperforming Spanish business for $5 billion.
It's also playing out on the financials, although in a limited way at the moment. In Q1, service revenue growth improved in almost every market.
Vodafone Service Revenue (VOD Investor Relations)
While a slow turnaround could kill a startup, I believe Vodafone has the scale and capital to ride this out and build a much stronger company in the next few quarters.
1H Earnings Preview
Vodafone is expected to announce revenue of $12.26 billion and EPS of $0.22, which will keep them on track for full-year guidance announced at the end of 2023 .
VOD Consensus (Seeking Alpha)
Consensus for EPS on a full-year basis has continued to trend downward over the past year.
Fortunately, Vodafone has developed a trend of beating consensus. During the past two years, EPS was beat five of eight times, and revenue was beat six of eight times.
While analysts are down on EPS, revenue consensus has started to tick up slightly over the past month.
Following Q4 2023 earnings on May 16, Vodafone plummeted on the heels of a layoff announcement and challenging KPIs. After the Q1 2024 earnings, Vodafone spiked briefly on better-than-expected earnings before returning to a depressed level.
All of this is to say, that I believe the bad news is fully priced into the stock, and we will more than likely see a beat on revenue and/or earnings. To put the low share price fully into perspective, consider valuation multiples. Nearly across the board, multiples are depressed versus the sector and the five-year average. Most notable for a high dividend company, P/E of 2.05 is 87% below the sector, and price / cash flow of 1.31 is 82% below the sector.
What I Will Be Watching
As 1H 2024 earnings are released, here's what I will be watching:
Business Growth
Growing market share among business customers is key to success. The business market is growing at 11%, and Vodafone was most recently growing at 4%. I will be looking for acceleration and continued success in this space to improve financials and offset risk in the Consumer space.
Pricing
ARPU results were mixed in Q1 earnings . However, management indicated during the earnings call that price increases were working through regulatory notice periods, and 50% more customers would be on higher pricing by the end of the year. I will closely monitor customer volumes and ARPU for signs that the strategy is playing out.
Management Commentary On Turnaround
Lastly, I will look for management commentary on the turnaround and additional signals that the strategy works. While there have been some early positive indicators, such as cost efficiency and service revenue growth, I will be looking for more consistent evidence that the company is executing its plan.
Verdict
Vodafone has had a challenging year with stagnant to declining revenue, and a slower turnaround than investors anticipated, depressing the stock price by more than 20%. Bears are concerned that the stagnant revenue will catch up to cash flow and reduce the dividend. However, I'm with the bulls on Wall Street (and their $14.05 average price target) in believing that Vodafone is a steal at the current pricing as valuation multiples are significantly depressed, and the turnaround is starting to yield results.
While the company has shown early success through cost efficiency and service revenue growth, sustaining this momentum and executing its turnaround strategy is pivotal. As the 1H 2024 earnings release, I'll watch these areas closely for improvement.
Given the valuation multiples and early signals that the turnaround plan is working, I rate Vodafone a buy in advance of earnings and encourage investors to take advantage of the double-digit dividend yield.
For further details see:
Vodafone Q2 Earnings Preview: Slowly Moving In The Right Direction