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Stock Watch

What impact will free cash flow have on the Vodafone share price post-earnings?

Vodafone share price: someone on the phone in front of the Vodafone logo

Vodafone is set to report its first-half results on 16 November, and investors are likely to be watching for any updates on free cash flow (FCF). The company has a full-year FCF target of €5.2bn, although as per a Reuters report, this was below the €5.4bn that analysts had forecast.

Ahead of the earnings announcement, the Vodafone share price has been trading flat in the past month. The stock is down 7.4% in the year-to-date at 114.44p, as of 12 November.

Q1 earnings lift the Vodafone share price 

When Vodafone reported its first quarter of 2022 earnings in July, the company announced revenue of €11.1bn, which represented a year-on-year growth rate of 5.7%. 

Standout highlights included roaming and visitor revenue growth of 56% from the year-ago quarter – albeit still down 54% from the pre-pandemic first quarter of 2020. Service revenue in Germany, which accounts for 30% of the segment’s sales and 26% of total revenue, grew 1.4% year-over-year, which was a slight improvement on the growth rate of 1.2% reported for the fourth quarter of 2021.

Although the operating and retail environment has not yet returned to pre-pandemic conditions, Nick Read, chief executive of Vodafone, said that the company is on track to hit its full-year adjusted EBITDA target of between €15bn and €15.4bn.

The market reacted favourably to the first quarter of the 2022 report, with the Vodafone share price climbing slowly in August, closing the month at 122p. Since then, the stock has fallen away. 

Higher free cash flow 

According to Credit Suisse analyst Jakob Bluestone, Vodafone’s EBITDA margin of 34% is below the 39% margin of “incumbent peers’ domestic businesses”.

In a June note to clients seen by Proactive Investors, Bluestone argued that Vodafone would benefit from refocusing its portfolio on areas with strong operating FCF margin or “room to grow into strong operating [FCF] generation”.

“This could ultimately deliver the balance sheet to the point where Vodafone can buy back its own shares,” wrote Bluestone, adding that a buyback programme would add value for shareholders and, ultimately, give the share price a boost. 

What to look out for 

When Vodafone reported its fiscal year 2021 earnings in May, the company announced it would be accelerating investment in network expansion. According to Reuters, Citi analysts say spending will restrict FCF growth. With this in mind, investors will likely be looking for an update on how capital expenditure will provide high growth opportunities. Our chief market analyst Michael Hewson says, “investment in 5G to support future growth is expected to continue”.

He expects service revenue growth could also rise for another quarter thanks to the recovery of cross-border travel. But the European economy is beginning to slow, and “there is a risk of some underperformance,” Hewson points out. The record number of Covid-19 cases in Germany could also prove to be a test of resilience in the second half of the fiscal year, particularly if the situation worsens and the country’s borders are closed. 

Hewson expects half-year of 2022 total revenue to come in at €22.1bn. This would mean that the second quarter of 2022 revenue would be more or less flat sequentially. 

Analysts at both Citi and Credit Suisse are bullish on Vodafone. The latter has set a price target of 150p, which implies an upside of 33% from its 10 November closing price of 112p. 

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