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Vodafone Upgraded on Growth Plans - Analyst Blog

We have upgraded our long-term recommendation on Vodafone Group Plc ( VOD ) to Neutral from Underperform on the back of strong growth prospects in the emerging markets.

Although Vodafone reported lackluster earnings in the first half of fiscal 2012, revenue improved on strong data, messaging and fixed-line services.

Since the last downturn, Vodafone has returned to organic revenue growth and is continuously gaining market share in the majority of its markets. The British mobile phone giant is looking for further expansion in the emerging markets of Eastern Europe, India and Africa, through new growth strategies and exiting minority holdings to boost liquidity, free cash flow and shareholders' return.

Over the last year, the company dispensed with its minority holdings of Polkomtel, SFR and China Mobile and is in the process of selling Softbank Corporation holdings, which is expected to be completed by April 2012. This strategy is expected to generate annual organic service revenue growth in the range of 1% to 4% and free cash flow in the range of £6.0 billion to £7.0 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. We believe that Vodafone's new growth strategy aided by planned divestiture of minority holdings will place it favorably against larger rivals, Verizon Communications ( VZ ) and AT&T Inc. ( T ).

Despite growing market share gains, Vodafone continues to witness declines in service revenue and subscriber count, particularly in Italy and Spain, due to weakness in the economy, regulatory pressure and stiff competition. In addition, Vodafone's service revenue in Europe continues to be affected by reductions in mobile termination rates or MTRs (fees that operators charge each other to connect calls) and roaming prices.

Further,we believe that deteriorating margins and aggressive price competition, particularly in India would limit the upside potential of the stock. Moreover, the company might face a £7.2 billion liability for a 15-year renewal of spectrum in the UK, Germany, Italy and Spain, which could put undue pressure on the balance sheet.

Vodafone currently has a Zacks#3 Rank, implying a short-term Hold rating.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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