Vodafone investors settle for more of the same

Stabilisation and expansion

Organic service revenue growth of 2.2% year-on-year is the satisfactory outcome from Vodafone’s first quarter, signifying that remedies for last year’s disastrous value destruction are working. There’s been no let-up of “intense” competition in India though, the root-cause of Vodafone’s €6.1bn annual loss in 2016/17. But at least there’s been no deterioration since the last quarter, with service revenues stabilising there, the group said. Market forecasts of the group’s preferred underlying sales measure were as low as 1.4%, after the group scraped together 1.5% in the final quarter of its last financial year, Vodafone’s long-term run rate. The better-than-forecast showing in Q1 was welcomed with a stock price rise of as much as 2.8% on Friday. Hopes that the ‘Fit for Growth’ cost efficiency programme, now underway, may eventually elevate long-run organic service growth are intact. Even better, so is guidance of a 4%-8% rise in core earnings.

As CEO Vittorio Colao says, Q1 was a good start to the year. Even so, problem regions of the last few quarters are still giving cause for concern, even as Vodafone is at the head of the pack in regions where growth is rapid. The latter include the group’s Africa, Middle-East and Asia-Pacific demarcation, where organic growth was 7.9%, and Turkey, up a blistering 13.9%. The quality of such growth is certainly worth scrutinising—churn outside of established markets tends to much higher—though investors prefer that Vodafone is among the operators participating in the land grab rather than absent.

Europe ‘Fit for growth’

Frontier expansion is not offsetting static conditions in the group’s mature markets though. Italy’s post-deregulation explosion helped account for that region’s 5% total rise and 3.2% underlying advance, the group’s best Q1 organic showing in Europe, but, the region as a whole crawled just 0.8% higher in Q1. Germany, still the group’s largest revenue generating country, remained the biggest drag, halving to +0.6%. And whilst the UK account transfer debacle may be over, Vodafone’s home market remains an embarrassment, falling 2.7%, albeit better than in Q4.

Europe is the low hanging fruit for ‘Fit for Growth’, but Vodafone underlines that it is also attempting to get ahead of growth trends as well. It’s focusing on the rise in 4G and data at the heart of ‘more for more’ propositions, which have seen a 39% increase in data usage per smartphone customer in Europe. Impressive as such metrics are, they do not quite remove doubts about whether the current strategy can deliver a bigger quantum of growth over the medium-to-long-term, and that is a long-standing quibble of Vodafone’s investment case, last year’s Indian misadventure aside.

Investors will settle for more of the same

As a volatility play Vodafone isn't exactly up there these days, though it had its moments in the past. Having participated in dot com boom and bust, the stock infamously soared to its all-time high above 400p at the end of February 2000, before crashing to a low of around 80p in September 2002. Things have been more sedate in recent years. Vodafone's 5-year price return is virtually the same gain an investor would have received had they bought the stock on 1st January 2002 and held it till Thursday's close: around 22%.

For investors it doesn't matter much that the stock has not been a particularly fast-mover. Vodafone's total return over 15 years is 286%; 73.7% over 5. In short, action-packed Vodafone share price stories are uncommon. Unless, that is, the dividend appears to be threatened. And it's also easy to see why the shares have been subject to a persistent discount over the last few years due to nagging concerns that inertia on diversification (AKA quad-play) might impact cash generation. Cash that might not then find its way back to shareholders.

Still, there were no new fires to extinguish in the first quarter, and that in itself is backing for Vodafone’s pledge to turn up the notch on cash flow generation, and in turn to boost the dividend. Not so much 'more for more' as 'more of the same', for investors going into the second quarter.

• As can be seen from the technical chart of Vodafone’s daily price history, the stock appears to have made progress this year, though in the yearly context it’s worth pointing out that the net gain was just 1.1% at last check, including Friday’s post-update rise. The advance of around 14% year to date has nevertheless taken the shares back up to resistance between 231.5p-234p, last seen at the beginning of June and before that at the end of August 2016
• The failure at current levels therefore takes on significant importance given that the down leg that ensued in the first instance took the stock to an almost 2½-year low at 186.5p, on 2nd February this year. The stock may not be in the same condition (nor the wider European context) as in late 2016/17, though it’s worth keeping the stakes in mind
• It’s also worth keeping in mind the potential necessity for the shares to fill a small price gap created on Friday – something that traders are likely to get out of the way in nearby sessions, if at all
• Overall, VOD is mounting a challenge on the resistance zone mentioned above, backed with good momentum that is not yet overstretched (see slow stochastic sub-chart)
• Clearly 231.55p giving way would pave the way for 234p. The last barrier beforehand would be the high of 233.90p on 1st June 2017 (it was a high on 30th August 2016 that triggered selling; 234.050p
• With such a seismic move at that price, the risk is that major sellers in the region in recent history may still have orders around right now. Sure enough, one of the order decision-making tools most deployed by institutional investors, the volume-weighted average price (VWAP) currently trades at 238.3627, using a combination model within Thomson Reuters Eikon
• The stock had crossed the level at the time of writing, though added caution in the vicinity is advised, given such important overhead
• The bull case, should it be seen, will probably next see the stock above the 231.55p-234p region, which we would expect to see tested thoroughly before any attempt at the ultimate target of 240p, the failure high on 12th August 2016
• Should the stock not even achieve a sustainable foothold over 231.5p-234p, attention will move to whether highs in June and this month will hold, particularly 225p (Thursday’s). If not, there would be a clear risk that 215.7p—kick-off point of the May-June up leg— would be re-tested