Vodafone’s [VOD.L] share price has been getting a clear reception from investors this year. An easing of lockdown restrictions has seen business improve. More handsets are being sold, spurred on by the switch to 5G, and the mobile operator is bagging some sorely missed international fees.
This year Vodafone’s stock price is up 14.9%, closing Friday 22 July at 129.09p — a better performance than the wider FTSE 100’s 1.3% decline.
Yet, over the past month its share price growth has slowed to 2.9% as Vodafone comes under pressure from the same macroeconomic headwinds hitting other equities — namely soaring inflation and the rising cost of living. After all, faced with mounting bills people may well decide that a new phone takes second place to paying for the electricity to charge it.
Upcoming earnings for the fiscal first quarter 2023 should provide an insight on how the mobile operator is faring in the current economic climate.
What to look out for in Vodafone’s earnings
Vodafone last updated the market with results for fiscal year 2022. Brisk business in Africa and Europe contributed to a total group revenue of €45.6bn, up 4% year-over-year. Underlying cash profits came in at €15.2bn, up 5% from the year-ago quarter.
In the results, overall organic service growth was up 2.6% for the year. Yet, in the final quarter, Vodafone’s organic service growth had slowed to 2%, down from the previous quarter’s 2.7% growth. Any further slowdown is unlikely to be positively received.
Debt is another key metric. At last count the mobile operator’s debt pile stood at €41.6bn. The pricey acquisition of Liberty Global’s operations in Germany, Hungary, Romania and the Czech Republic in 2019 may have expanded Vodafone’s European reach, but it also came with a €19bn price tag. Vodafone thinks that the acquisition will deliver €535m a year in savings within five years of completion — something investors will want to see proof of.
Another growth area is business in Africa through its subsidiary Vodacom and the M-Pesa payment platform. In the financial year 2022, Africa delivered a solid €6bn in operating revenue.
Vodafone said it expects profits to come in between €15–15.5bn for the new financial year. Whether this is still the target as the cost of living goes ever higher could move Vodafone’s share price post earnings.
Consolidation in the industry
Vodafone and Three are rumoured to be considering merging their UK divisions. The deal would need approval from the Competition and Markets Authority (CMA) as it would bring together the UK’s third and fourth biggest operators. Getting approval from the CMA is by no means a sure thing. In 2015, the watchdog called for a similar deal between Three and O2 to be blocked.
Elsewhere, Vodafone’s broadband business could come under pressure from Virgin Media’s bid for rival TalkTalk. Should this come to fruition it would create the UK’s second largest broadband provider. Fifth placed Vodafone had previously bid for TalkTalk and the latest development could put pressure on it to make a counter offer.
Despite all the investment and opportunity 5G offers, ultimately there isn’t much to separate Vodafone and its competitors. Consolidation with Three could put it in a stronger position to take on market leaders EE and O2 by the simple fact that the market would become smaller.
As it stands, Vodafone’s share price has a median price target 154.83p from analysts polled on the Financial Times. Hitting this would see a 20% upside on Friday’s close. The highest price target is 225.44p, which would see a 74.7% upside, while the lowest is 109.74p, suggesting a 14.9% downside.
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