Should Vodafone Take This Deal?

With shares of Vodafone Group Public Limited Company (NASDAQ:VOD) trading at around $26.54, is DAL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Vodafone has a 45 percent stake in Verizon Communications Inc. (NYSE:VZ), and Verizon wants to buy out that stake for full ownership. The original merger took place in 2000, but the business landscape has changed dramatically since that time. These two companies don’t see eye to eye anymore.

Many analysts feel that the deal isn’t feasible due to debt, but Verizon has stated that the deal is indeed feasible, and that a strong wireless business makes a deal easier. There was a potential deal in 2006, but it was eventually rejected.

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Vodafone has been steadily improving cash flow, and the company sold stakes in SFR and Polkomtel for a combined $3.5 billion. Vodafone also receives dividends from Verizon, which allows Vodafone to pay its own dividend and buy back shares. Vodafone currently has 407 million mobile customers, and that number is likely to grow. In addition to that, Vodafone is increasing exposure in emerging markets such as India and Turkey. However, there is one catch, which will be mentioned later. For now, let’s take a look at some important numbers for Vodafone.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Vodafone is strong, but the balance sheet is weak.  

Debt-To-Equity

Cash

Long-Term Debt

VOD

0.50

$12.23 Billion

$57.09 Billion

S

2.51

$6.33 Billion

$21.30 Billion

VZ

0.57

$10.31 Billion

$52.80 Billion

 

T = Technicals on the Stock Chart Are Mixed

Vodafone has underperformed Sprint Nextel (NYSE:S) and Verizon over the past three years.

1 Month

Year-To-Date

1 Year

3 Year

VOD

2.69%

5.48%

1.21%

44.18%

S

4.92%

5.29%

172.60%

50.38%

VZ

0.63%

3.28%

20.78%

63.44%

 

At $26.54, Vodafone is currently trading very close to all its averages.   

50-Day SMA

26.53

100-Day SMA

26.44

200-Day SMA

26.12

 

E = Earnings Have Been Steady

Earnings have been steady, but they haven’t been exceptional. That said, earnings can be manipulated. It’s better to look at the top line, which shows steady growth since 2009.  

2007

2008

2009

2010

2011

Revenue ($)in billions

71.24

70.63

70.98

71.40

74.09

Diluted EPS ($)

2.50

0.89

2.60

2.30

2.17

 

When we look at last quarter’s results on a YoY basis, we see nothing. Quarterly results are not available.

9/2011

12/2012

3/2012

6/2012

9/2012

Revenue ($)in billions

N/A

N/A

N/A

N/A

N/A

Diluted EPS ($)

N/A

N/A

N/A

N/A

N/A

T = Trends Support the Industry

The mobile market is on fire. Therefore, trends support the industry.   

Conclusion

So far, it would look as though Vodafone would be crazy to take the deal. On the surface, that makes sense. But let’s take a more macro viewpoint. Mobile is hot at the moment, and it looks as though growth potential is never-ending. However, this is rarely the case. Every industry faces new unexpected challenges, and there is no telling which companies will go from darlings to dogs.

Another important factor here is that the vast majority of Vodafone’s business comes from Europe. As we all know, there is significant weakness in Europe at the moment. This weakness is expected to continue, which will make it difficult for Vodafone to meet expectations, let alone exceed expectations.

Would you rather have a 100 percent chance at becoming rich or a 50 percent chance at becoming ultra-rich? The odds of Vodafone exceeding expectations and looking back at this as a missed opportunity are about 50 percent. Taking a guaranteed profit is always a wise decision.

The answer to the question in the title is “Yes.” Vodafone should take the deal. It might not look like the correct decision right now, but it will likely be the correct decision over the long haul.

The potential of a deal and a weak Europe cancel each other out, making Vodafone a WAIT AND SEE.

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