VOD shares remain some way off their 12-month high and a brisk rally remains unlikely following a downgrade of the firm by UBS, the investment bank, which this week suggested the stock offered investors “deteriorating fundamentals”. UBS also admitted their previous price target valuation of 150p* per share was, on reflection, too optimistic and revised their price target 23% lower to 115p* per share and removed the stock from the bank’s “buy” list and into the “neutral” pot. (*UK LSE listed stock).
The report will prove to be particularly unsettling for VOD investors who were hoping overseas growth may compensate for UK weakness. UBS cited Vodafone was losing market share in three of its four key European markets and that the current scenario was unsustainable.
Vodafone recently confirmed full year profits to 31st March 2009 (before tax) of £4.2bn, 54% down on the year before, though it raised its dividend by 3.5% appeasing income hungry shareholders. Looking forward, even the olive branch of dividends may not be secure. The dividend cover (profit attributable to shareholders divided by actual dividends paid) is uncomfortably weak and another year of falling profits may force the firm to re-think its dividend growth strategy.
For investors who like to pay attention to detail I recommend a close look at ARPU (average revenue per user) data in Vodafone’s next update. Continued deterioration in this regard would encourage me to surpass UBS and move the stock further down the investor food chain from “neutral” to “sell”, until evidence of a recovery is apparent.
UBS closed its analysis warning investors, following the stock’s decline, not to mistake cheapness with “good value”. Wise words indeed.