At the end of last year, I wrote an article entitled Is Vodafone A Value Trap? It was, to say the least, a little controversial.
Those who actually read this article would know that I concluded that Vodafone (LSE: VOD) (NASDAQ: VOD.US) was not a value trap, and that I would not be selling my shares. However, I had concerns about where this company would find growth from.
Quite simply, the predicted earnings for forthcoming years showed no increase at all. So this left me, and many other investors, somewhat unsure about the telecoms provider. The company was undoubtedly cheap. But, with much of its business in a Europe where telecoms spend is decreasing, was this a company in decline?
Reassessing the company’s prospects
But a lot of water has passed under the bridge since last year’s article. I thought I would take the opportunity to revisit the company and its prospects.
Notably, there has been a lot of debate about Vodafone’s stake in US mobile telecoms company Verizon Wireless. Most have concluded that there is a lot of value in this stake, which would be unlocked by a sale. Whether or not a sale actually takes place, my view is that this debate has highlighted the credentials of Vodafone as a value investment and so will be good for the firm’s share price.
There is also emerging market growth. Emerging and frontier markets now represent 30% of Vodafone’s revenue. Growth in revenues from India is at 13%.
Then there is growth in data traffic. Data traffic is currently increasing at a rate of 60% a year. The current rollout of 4G will drive this data boom.
And finally, there is pay television. Vodafone has recently agreed to buy Kabel Deutschland, one of Germany’s main pay-television providers.
This is a proactive strategic move that may add substantially to Vodafone’s profits. Just see the success that BSkyB has had in the UK, where — after working hard over many years to grow its product range and increase subscriber numbers — it is now reaping the rewards with steadily increasing profits. Pay television is an area that I expect will continue to boom.
A new plan for growth
I think all this adds up to what I have been looking for from Vodafone: a clear plan for growth. The company will aim to increase the revenue and profit share of emerging markets, and reduce its dependence on Europe.
It will be a major player in the data boom and it will, perhaps, realise the potential of its stake in Verizon Wireless. And it will expand into pay TV, broadband and fixed-line telecoms.
I admit it: I have changed my mind about Vodafone. I expect the share price to progress further, and I would rate the company a long-term buy. As Edward de Bono once said: “If you never change your mind, why have one?”
Foolish final thought
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> Prabhat owns shares in Vodafone, but in none of the other companies mentioned in this article. The Motley Fool has recommended shares in Vodafone.
