Vodafone Stays Neutral

We are maintaining our long-term Neutral recommendation on British mobile phone giant Vodafone Group Plc ( VOD - Analyst Report ) . The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).

Vodafone continues to gain market share in the majority of its markets due to the strong adoption of data services and migration to smartphones. The company’s future growth hinges on five strategic components that include increasing mobile data services, enlarging growth in enterprise segments, expanding growth in emerging markets including Eastern Europe, India and Africa, growing in new areas and maintaining liquid investment in quality networks.

These growth plans along with the minority holdings divestment strategy are aimed to boost overall profitability and liquidity of the business. As a result, Vodafone recently turned the top dividend payer and has rewarded its shareholders with the largest-ever dividend this year despite the ongoing economic weakness in Europe. Additionally, management expects consolidated EBITDA margin to improve this year and adjusted operating profit is expected in the range of £11.1 billion to £11.9 billion.

However, these expansions might not bear fruit this year as expected due to the growing concerns about economic conditions, in particular southern Europe. The company generated lackluster performance in the first quarter of fiscal 2012 (ended June 2012) owing to the lingering weak economic conditions in southern Europe.

Additionally, the southern Europe will continue to remain a headwind for the remainder of the calendar year 2012 due to reduced mobile termination rates (MTRs) in Italy and Spain. Further, harsh regulatory terms and stiff competition from larger rivals like Verizon Communications Inc. ( VZ - Analyst Report ) and AT&T Inc. ( T - Analyst Report ) would continue to dampen service revenue and subscriber count.

Considering all pros and cons, we remain on the sideline at present and conclude that Vodafone’s profitability remains under pressure until European economy improves.