Once you get a taste for something, it’s tough to kick the habit.
Indeed, that’s what I feel Vodafone (LSE: VOD) (NASDAQ: VOD.US) is currently experiencing after all the hype from the sale of its 45% stake in Verizon Wireless to Verizon Communications.
All the headlines and all the attention are tough to leave behind, so Vodafone seems (to me, at least) to be trying to extend its ’15 minutes of fame’ and is seemingly pursuing a new strategy of acquisitions.
The first of these is the Kabel Deutschland deal. Although I appreciate that there are merits to the acquisition, it is nonetheless another European acquisition, where economic circumstances are not exactly favourable at the moment.
Furthermore, Vodafone has stated recently that it sees itself as a “natural consolidator” in India, with the company’s chief executive of India saying it was well placed to participate in any forthcoming deals.
Certainly, India has potential; however, as I have written about previously, the Indian economy is currently going through a very challenging period.
So, why would you wish to buy companies in regions that are struggling?
Surely, management should be seeking out undervalued opportunities in markets that are either performing well or that do not come with the challenges that Europe (in the form of slow growth) and India (in the form of slowing growth and tax problems) bring?
In any case, Vodafone remains a stock that I am bearish on for the following three reasons.
Firstly, I have doubts about its strategy. Selling the best part of the business doesn’t make sense at the best of times, but giving the proceeds back to shareholders and pursuing acquisitions in less attractive markets makes the sale look like a strange move.
Secondly, earnings per share (EPS) growth is faltering, with the market forecasting just a 1% increase this year. This is less than the UK economy is expected to grow by.
Thirdly, Vodafone’s yield may be relatively high at 5.1% but it masks the problems in the rest of the business. Therefore, I feel it is just a matter of time before the market is able to see beyond a generous yield to uncover the strategy shortcomings, with investor sentiment taking a hit should this take place.
So suffice to say, I’m not Vodafone’s biggest admirer, with a questionable strategy, lack of growth and a ‘diversionary’ yield making me bearish.
> Peter does not own shares in Vodafone. The Motley Fool has recommended shares in Vodafone.