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We maintain our Neutral recommendation on Vodafone Group PLC (VOD - Analyst Report). Despite the strong growth prospects of Vodafone — the world’s largest revenue generating wireless communications operator and the second largest carrier after China Mobile Limited (CHL - Snapshot Report) based on subscriptions — we are concerned about a decline in service revenue and subscriber count, particularly in Italy and Spain. This is due to economic weakness, regulatory pressure and stiff competition.

Additionally, reductions in mobile termination rates and roaming prices remained detrimental to this Newbury, United Kingdom based company. The impacts were evident in in the first half of 2012 when the company registered modest growth in terms of earnings, and a substantial drop in revenues.

However, Vodafone’s strong subscriber and revenue growth and lower infrastructural costs in emerging markets can partially offset challenging market conditions in Europe and provide a high profit margin.

Further, the company is increasingly making efforts to shift towards more data centric services in the emerging markets as the level of data services there remain considerably low. This should provide opportunities for deeper penetration. 

Vodafone is continuously gaining share in the majority of its markets due to the strong adoption of data services and migration to smartphones. Vodafone’s future growth hinges on the increase in mobile data services, implementation of converged fixed and mobile services (Vodafone One Net), growth in new areas including machine-to-machine, near-field communications and mobile financial services, as well as maintenance of liquid investment in quality networks.

Additionally, the company is strengthening its foothold in the enterprise market. On November 30, 2012, the company integrated its enterprise business to create a dedicated enterprise operational structure and formed a new business segment - Vodafone Group Enterprise. The new segment will be effective starting on January 1, 2013, following the integration process of Cable & Wireless Worldwide, which was acquired in July 2012.

We believe the restructuring of enterprise business and integration of Cable & Wireless Worldwide, which specializes in managed voice, data and IP-based services dedicated to serve corporate, governments and carriers, will enable the company to enhance its product portfolio and tap opportunities in large and medium-sized businesses.

For the short term (1–3 months), Vodafone has a Zacks #2 Rank, implying a Buy rating.

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