One to Watch: Vodafone

ONE TO WATCH

Vodafone

124.1p +3.6p

Western Europe remains the company's main market (73 per cent of revenues) with India (5 per cent) being a key driver of future growth. The company also operates in the US via a joint venture with Verizon Communications.

Recently revealed third-quarter numbers, covering the period from September to December, demonstrated Vodafone's resilience. In the core European markets of the UK, Germany and Italy, underlying mobile revenue trends were better than expected. India continued to perform well, with more than two million monthly net adds and revenue growth of 30 per cent. Guidance for full-year revenues was raised by nearly 2 billion as the company benefits from the weakening of sterling.

Whilst the telecoms sector still offers relatively defensive revenues and earnings, Vodafone faces the challenge of dealing with the prospect of slower rates of growth in emerging markets and continued competition in the mature European arena. The new chief executive has demonstrated he is prepared to meet this challenge by making accretive disposals and simplifying the company's portfolio of assets. Thankfully for investors, this appears to signal an end to the days of Vodafone making value-destroying acquisitions. He has also indicated a desire to cut costs with about 1bn of cuts expected by 2011. Increased customer usage of data services is expected to help boost revenue growth and provide margin stability in the face of increasing pricing pressures on voice revenue.

Currently trading on an estimated 2009 p/e of 10x, we believe the stock still offers significant value to investors. Vodafone's dividend yield for the same period is in excess of 6 per cent and can be considered very stable.

This article is for information and discussion purposes and does not form a recommendation by the manager to invest or otherwise.