The last six months have been dire for Europe. Anaemic growth, a slowing rate of inflation and a complete lack of confidence are combining to push the single currency zone towards recession and deflation. Clearly, the ECB has been much slower to act that their UK and US counterparts and, as a consequence, the Eurozone is still growing at an incredibly slow rate.
This has had a negative impact on Vodafone (LSE: VOD) (NASDAQ: VOD.US) since it is now heavily focused on the region following its sale of its stake in Verizon Wireless earlier in the year. As such, shares in Vodafone have fallen by 6% in the last six months. However, there is light at the end of the tunnel and Vodafone can overcome the challenges it faces in Europe. Here’s how.
A Change Of Direction
Vodafone’s strategy of buying high-quality European assets at very depressed prices makes huge sense in theory. After all, there is an opportunity to ‘buy low and sell high’, which is the goal of every investor. Indeed, Vodafone’s strategy is on target to pay off in the long run and could help to boost its bottom line.
However, in the short to medium term it leaves Vodafone heavily exposed to a struggling economy and this is putting downward pressure on market sentiment and, subsequently, on the company’s share price.
One solution that is quite straightforward for Vodafone to implement is a switch in focus away from Europe. It could simply decide that it has enough exposure to Europe through which to benefit from an upturn in the region’s fortunes, and instead focus its vast financial firepower elsewhere in the world.
This would undoubtedly be welcomed by investors as it seems to offer the best of both worlds: a longer-term plan that is great on paper combined with an initiative to boost the company’s bottom line in the shorter term. It would not be a case of ‘giving up’ on the European strategy, but rather an attempt to diversify Vodafone’s operations and focus the company’s capital on a prudent mix of investment opportunities.
Looking Ahead
As mentioned, Vodafone has the resources to engage in multiple, major acquisitions. Furthermore, with interest rates unlikely to remain low in perpetuity, now could be the right time for the company to step up its M&A activity and take advantage of the low cost of borrowing that is on offer.
Certainly, the Eurozone has huge potential and it is worthwhile for Vodafone to maintain a significant exposure there. However, with the rest of the world moving ahead at a much faster pace, Vodafone could improve sentiment (as well as its bottom line) by ‘pivoting’ away from Europe.
With a yield of 5.5%, this could give investors in the stock much more to cheer about than just a generous income over the short to medium term and may be the catalyst that pushes Vodafone’s share price northwards.
