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The Vodafone share price jumps on today’s news. Is the recovery on?

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Communications giant Vodafone (LSE: VOD) was the standout gainer in the FTSE 100 this morning following news of improved trading and plans to create a European towers business.

Could this mark an end to the seemingly perpetual fall in the company’s share price? I’m cautiously optimistic.

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Spin-off incoming

Let’s look at today’s numbers first. At 10.7bn, group revenue was 2.3% lower over the three months to the end of June compared to over the same period in 2018, due to the impact of foreign exchange rates. 

Thanks to better market conditions in Italy, however, service revenue in Europe showed signs of improving — declining 1.7% to €6.8bn in the quarter, compared to the 2.1% fall in Q4.

A record low mobile churn was encouraging as was CEO’s Nick Read’s expectation that this “gradual recovery” would continue. For the ‘Rest of the World’, service revenue rose 5.3% to €2.1bn.

Positively, Vodafone stated it was confident of meeting its revised adjusted earnings (EBITDA) target of €13.8bn-€14.2bn and free cash flow of “at least” €5.4bn for the full year. 

But while news of better trading was encouraging, it was the announcement of Vodafone’s intention to “unlock the embedded value” of its near 62,000 towers. That will see the creation of Towerco by May 2020 (and perhaps listing  the business within the next 18 months), news that really got the market excited.  

The reason for this isn’t hard to fathom. It’s been clear for some time that the £35bn-cap has needed to do something to tackle its big debt pile. The listing will go some way towards improving this situation, generating roughly €1,700m in revenue and €900m in profit per annum.

The move to exit markets such as New Zealand will do no harm to the balance sheet either, as will the recent signing of numerous network sharing agreements. Earlier this week, it was announced that Vodafone and rival O2 had decided to share 5G technology in the UK to help more people get access to fast speeds sooner. That will reduce roll-out costs for both companies and allow for this cash to be deployed elsewhere. 

On the up?

With Vodafone’s shares up 9%, it seems many investors are buoyed by today’s news, even if the company’s final decision on whether to list Towerco or pursue an alternative “monetisation option” (such as selling a minority stake) will ultimately depend on market conditions.

That said, the stock still trades almost 20% lower in price to where it was one year ago. Considering the FTSE 100 index is down a little over 2% over the same period, there’s clearly a long way to go before Champagne corks can begin popping.

Despite today’s gains, the fact that shares looked fairly pricey on 18 times forecast FY2020 earnings before markets opened could also make it hard for this momentum to be sustained, at least in the near-term.

After all, the company still faces significant competition from rivals, despite the aforementioned agreements to share infrastructure. Investors must also contend with lower cash payouts following management’s (overdue) decision to slash the dividend by 40% back in May.

Bottom line

Vodafone isn’t out of the woods by any stretch of the imagination. But recent developments lead me to be more upbeat on the company’s prospects for the first time in years. A recovery, however painfully slow, could finally be underway.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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