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On Jan 17, we downgraded our recommendation on Vodafone Group Plc (VOD - Analyst Report) to Underperform. We believe the company is facing top-line pressure from its transition to data from voice & text in Europe.

While this shift bodes well for the long term, it poses a significant near-term spending burden on network platform upgrade and promotional activities. In addition, we are wary of declines in service revenues and subscriber count, specifically in the European markets.

The Zacks Consensus Estimate for fiscal 2014 is pegged at $2.38. The stock currently carries a Zacks Rank #4 (Sell).

Why Underperform?

The Zacks Consensus Estimate for Vodafone’s fiscal 2014 slid two cents in the past 30 days to $2.38. There was no positive estimate revision over the last 60 or 30 days, but one estimate was revised downward in the last 60 days indicating a cautious outlook on the company.

We believe weak economic conditions have forced consumers to switch to cheaper alternative services offered by competitors. This will likely have negative implications on the company’s future operating performance. Consequently, in fiscal 2014, management expects EBITDA margin (excluding M&A and restructuring costs) to fall marginally on a year-over-year basis due to the ongoing weak economic environment in Europe.

Vodafone reached an agreement with Verizon Communications Inc. (VZ - Analyst Report)  to sell its 45% interest in Verizon Wireless for $130 billion. With the influx of this capital, the company aims to further expand in other key markets like India and Germany.

However, Verizon Wireless was a lucrative source of dividend payments for Vodafone. The proposed deal to sell Verizon Wireless stakes to Verizon Communications would perhaps mean an exit from one of its legacy markets, North America, and a deeper focus on its growing business in emerging markets. However, we believe that with Vodafone’s European operations facing troubles, and emerging markets like India and Africa at their nascent stages of development, the call to do away with its position in the U.S. could prove critical.

Other Stocks

Better-performing stocks in the sector include KT Corp. (KT - Snapshot Report) and Fairpoint Communications, Inc. (FRP - Snapshot Report), each with a Zacks Rank #2 (Buy).

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