Vodafone: Good Results But Falling Stock; Why the Confusion?

Ahead of British cell phone operator Vodafone’s (VOD) release of the next iPhone from Apple (AAPL) sometime this year, the carrier today announced revenue from cell phone users browsing the Web and sending email and other data functions rose 41% in the year ending March 31. (That’s on an organic basis: it was actually 52% including acquisitions the company made in the fiscal year.)

The company’s shares sank by 1.7% in London, while its American Depository Receipts are down about 1% at $32.12 in New York Stock Exchange trading.

I got a quick read on the results this afternoon from Sanford Bernstein analyst Robin Bienenstock, who follows the company from London. The results were positive, says Bienenstock, with strong growth in India, and the prospect that data, just 6% of the year’s revenue at this point, will keep increasing as the iPhone and forthcoming models of Research in Motion’s (RIMM) BlackBerry get into people’s hands. “The forecasts of cellular usage have always been too narrow,” she says. “I remember people thinking only Michael Douglas, standing in Central Park with a brick phone, would be using a mobile phone,” and it’s the same overly narrow read on data services, she thinks.

So, why are the shares down? Well, CEO Arun Sarin is stepping down, though that seems to have been more or less expected, says Bienenstock, though maybe not so soon. General economic concern abounds, with worries about possible declining fixed-line telecoms use in Europe, as has been the case in the US. Bienenstock says Vodafone is relatively better protected as a vendor of primarily mobile services, seeing as Mobile has lower rates than fixed line services. There may also be simple profit taking after many bid up shares in expectations of a beat and raise end-of-year report.

My conjecture: What may be confusing investors is that some queued up for the fat 4.5% dividend yield (for the ADRs), but Vodafone shows signs of continued investing for growth, which could crimp the dividend. Capital expenditures will be higher than people expected, with the company forecasting Great British Pounds (GBP) 5.3 billion to GBP5.8billion for the year ending next March while consensus was calling for GBP5.1 billion. Sales should be higher than analysts expected, in a range of GBP39.8 billion to GBP40.7 billion, versus GBP39.7 billion, but free cash flow will still be only flat with this past year. That dims prospects the dividend will go up.

Bienenstock thinks investors may be pleasantly surprised by Sarin’s replacement as CEO, Vittorio Colao, who has served as Deputy Chief Executive. Colao, who is younger than Sarin (46 years old versus 53), was head of Pronto Italia, before it got bought by Vodafone at the beginning of the decade. He knows well, therefore, one of Vodafone’s most important mature markets, with Italy bringing in very high Ebitda margins.

Colao, says Bienenstock, may be more conservative than Sarin in terms of capital investment, and more likely to focus on return on invested capital and returning cash to shareholders.

So, maybe there’s upside to the dividend after all.

Comments

[imacademic]

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would come in handy one day. My only fear - "input=outputz.&q...

[Chris-MGA]

How will the Verizon/Alltel merger affect Vodafone stock?