Global Guru Rings up Vodaphone
10/15/2014 7:00 am EST
Vivian Lewis looks to a London-based telecom firm as her latest new recommendation; the editor of Global Investing is particularly intrigued by the firm's long-term potential in emerging markets.
Vodaphone (VOD) shares have been priced recently based on its actual and potential US deals. First, the company sold its stake in a joint venture with Verizon (VZ). Then rumors began that VOD was a target for AT&T (T).
The company also announced Project Spring, which is supposed to differentiate its European network from those of rivals by bringing over US innovations for better networks.
Vodaphone will spend £19 billion over the next two years, before cutting back to a target of 13-14% of revenues.
On one hand, Vodaphone's UK business is a mess with spiraling costs eating its margins. Offsetting that, VOD has a low debt ratio for a telco, at 41%, thus a strong balance sheet.
Europe accounts for 2/3 of sales and service revenues. However, our reason for buying now is based on the other third—emerging markets—where business is growing faster: up 6% on average in the first half and up 13% in India.
VOD is present in the Middle East (notably Egypt and Turkey) but 60% of its emerging markets business is in Africa, via a sub called Vodacom, traded in South Africa, which I want to own, at least, indirectly.
We are particularly optimistic about the prospects for M-Pesa, a money-transfer system developed about seven years ago in Kenya for a place where banks and landline telephones barely function. It allows people to use their cell phones to transfer money and pay bills.
M-Pesa now is an offer in a dozen countries, mostly African, but also including Egypt, Romania, and India. There are 17 million users at last count. There will be more.
M-Pesa was developed for 2G cell phones but its users are now being upgraded by VOD to 3G and smartphones. The growth telecom markets now are emerging ones, which account for over 300 million of the world's 435 million phone users.
There are 26.4 billion VOD shares out and just over 10% is owned by institutions. The yield is 7% but analysts are not sure it can continue. However, this is not a yield play but a buy and hold idea. The trailing p/e ratio is a beaten down 4.9 times.
The UK shares and the US-listed shares trade as VOD. US analysts appear to hate the stock: 56 of those who cover it rate it hold or sell and only eight American analysts rate it a buy.
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