Vodafone Group Plc (VOD), the largest revenue generating international wireless carrier, reported fiscal 2011 results on May 17. Adjusted earnings per share missed the Zacks Consensus Estimate but improved from the year-ago earnings.

Fiscal 2011 Review

Since the last downturn, Vodafone has returned to solid organic revenue growth and gained share in the majority of its markets. Vodafone recorded broad-based improvements in its operations and made strategic progress over the year. Among the emerging markets, India gained the number two market position by revenue, South Africa retained its number one position and Turkey is generated double-digit revenue growth.

The year-over-year improvement in Vodafone’s full-year adjusted earnings was driven by higher revenue and the ongoing share repurchase plan. On a GAAP basis, earnings declined due to higher discount rates and interest rates in Spain, Greece, Portugal, Italy and Ireland.

Revenue remained strong but was below the Zacks Consensus Estimate. More than half of the revenue growth was organic, coming largely from emerging markets and signs of renewed growth in some parts of Europe. Favorable market trends and share gains in India, Turkey and South Africa led to the further revenue growth. European operation (accounted for 70% of total revenue) generated lower revenues on account of continued regulatory pressures and difficult economic conditions in Southern Europe.

Africa, Middle East and Asia Pacific represent the remaining 30% of the total revenue. The region showed substantial growth during the year on the back of strong results in India, Vodacom, and other regions, except Egypt. The socio-political unrest has an adverse affect on the operations in Egypt. India continued to be a key driver of strong subscriber growth in the region.

(Read our full coverage on this earnings report:Vodafone Reports Below Par)

Agreement of Analysts

The trend noticed over the last 30 days shows the analysts’ negative bias in estimate revisions for the upcoming fiscal years. Four analysts out of eight and one analyst out of four made downward revisions for fiscal 2012 and 2013, respectively. None of the analysts moved in the opposite direction.

Over the last 7 days, the analysts have not revised their estimates.

The analysts are concerned about deteriorating margins, aggressive price competition in India and the company’s over-reliance on cost cutting to boost operating results.

Vodafone is experiencing a decline in service revenue and subscriber count particularly, in Southern Europe, due to weakness in the economy, regulatory pressure, stiff competition and reductions in mobile termination rates (MTRs). The company expects that further regulated cuts to MTRs to adversely affect service revenue growth by an estimated 2.5% in fiscal 2012. The persistent revenue decline in some of the Southern European operations will lead to lower EBITDA margins for fiscal 2012.

Vodafone is exiting minority holdings to expand in emerging markets, such as Eastern Europe, Asia, India and Africa to fuel growth. The company sold its entire 3.2% stake in China Mobile (CHL) last year. Vodafone is in the process ofselling securities in the Japanese wireless operator Softbank Corporation. The first tranche was sold in December and the other is expected to be sold in April 2012. Further, the company agreed to sell its 44% stake in the French joint venture,SFR, to Vivendi by the end of June, subject to regulatory approval.

Although we believe the three transactions will help Vodafone to reward shareholders in the form of share buybacks totaling £6.8 billion, it will likely reduce the company’s sharing profits for the sold minority stake. Adjusted operating profit is expected in the range of £11.0 billion to £11.8 billion for fiscal 2012, reflecting a loss of £0.5 billion in profits from the sale of 44% stake in SFR.

However, the growth strategy is expected to generate organic service revenue annual growth in the range of 1% to 4% per annum and free cash flow in the range of £5.5 billion to £6.5 billion over the next three years (2011–2014). Over the same period, Vodafone expects EBITDA margins to stabilize, with continued cost efficiency, regional scale and improving margins in various markets including India.

Moreover, Vodafone is aggressively pursuing its cost reduction program that includes workforce reduction in Europe. The company will transition its data pricing plans to tiered plans and differentiated service levels andexpects smartphone sales in Europe to grow from the current 32% to more than 70% by 2013.

Vodafone is also committed to its shareholders in the form of increased dividends. The company targets 7% per annum dividend per share growth policy over the three-year period (2011–2014) and expects total dividends per share to be no less than £0.1018 for fiscal 2013.

Magnitude –– Consensus Estimate Trend

The Zacks Consensus Estimate for fiscal 2011 remained stable at $2.69 over the last 7 days but decreased by 6 cents over the last 30 days. The estimate represents a moderate 5.76% increase year over year.

Similarly, for fiscal 2012, the Zacks Consensus Estimate remained static at $3.01 over the last 7 days but declined by a nickel over the last 30 days. The estimate represents a substantial increase of 12.05% annually.

Neutral Recommendation

We believe Vodafone remains well positioned for strong performance based on increased market share gains in emerging markets coupled with successful smartphone and data services. The company continues to invest further in its European network in order to meet the growing demand for smartphones with different tiered pricing plans. Furthermore, Vodafone’s new growth strategy and exiting stake of minority holdings will strengthen the company’s position relative to its peers Verizon Communications (VZ) and AT&T Inc. (T).

However, persistent revenue decline in southern European operations, lower expected margins arising from the sale of minority stakes as well as regulatory and competitive pressure keep us on the sidelines. Further, we believe that investors have been concerned with a less favorable business outlook in Europe (especially in Spain, Germany and the UK).

Hence, we are currently maintaining our long-term Neutral rating on Vodafone. For the short term (1–3 months), we hold a Sell rating with the Zacks #4 Rank.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

 
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