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MARKET COMMENT
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The headlines may harp on about a loss of £9.5b but the truth is that today's interim results from Vodafone (LSE: VOD) were actually pretty good. That's not really a surprise though. The company knows how to play the earnings game and consistently makes sure that it makes promises it knows it can keep. But no matter how good the company is, there is always a price that is too high -- where the risks outweigh the potential rewards. The headline losses arose from a write down of some of the unwanted fixed line businesses acquired on the dash for global domination. They don't represent a cash cost. Vodafone hasn't written down the value of any of its mobile businesses and it hasn't written down the value of the 3G licences acquired that last year either. In the case of the latter it's too early really -- the UK launch of this service is expected in the second half of 2002. The basic numbers showed a 27% increase in turnover and a 40% increase in operating profits. Part of this growth is from acquisitions but most of it is organic. Operating margins now stand at an impressive 35.3% but this is bound to attract more unwelcome attention from the regulators. Amongst the wealth of operating data that accompanies these results it's Average Revenue Per User (ARPU) that is perhaps the most useful. It had fallen recently due to the take up of prepaid deals. However, the emphasis of offering these to grab customers has worn off and now the focus is cutting costs to maximise profit per customer. Today's numbers demonstrate it is working. Net debt has increased to £9.2b, due to recent further acquisitions in Japan and Spain. It still looks comfortable although operating cash flows for the next years will be largely offset by heavy capital expenditure. Forecasts for the full year to March 2002 are for earnings per share to come in at 4.8p. 2.5p of that is in the bag for the first half of the year. Based on this the current share price of 178p values Vodafone on a forward multiple of 37 times. That looks too high to me. The shares have risen almost 50% in the last two months as investors focussed on the attractions of telecoms but it looks like everyone has gotten a bit too enthusiastic. More: Vodafone discussion board