If, by the time you have finished reading this piece (around 4-5 minutes from now), youre thoroughly confused, then I havent done my job. What Id like to flesh out briefly here are the reasons you would hold Vodafone (LSE: VOD) (NASDAQ: VOD.US) as an investment.
This is a tricky stock pick because Vodafones future is not certain. That said, it does present some attractive features for investors.
Its a solid company
Vodafone produced income of 59.25 billion over the past 12 months. Thats not too dissimilar from rival Virgin Mobile. The mobile phone company, though, has struggled on the revenue side (largely due to market saturation). Despite that, its managed a net profit margin of around 30% (thats better what Virgin Mobile could squeeze out). Vodafone also knows a thing or two about working its assets. Its ROA is around 8.5% (Virgin at 5% ROA has to work up a little more sweat for the same output). Vodafone also kicked a goal with its recent dividend payout. Its DPS is a little over 11p, pulling a yield of around 5.5%. On those metrics alone youd be looking seriously at the stock as a possible income play (if holding a large parcel off shares).
It has problems
Dont they all!
Seriously, though, who do you know who doesnt have a mobile phone? Anyone?! I was a late-comer to the party. I only got around to buying one in 2001 but that was over a decade ago. Mobiles arent like landlines, either they have a relatively limited life. That would work well if the market consisted of just Vodafone and Virgin Mobile. The reality, though, is that there are quite a few players. Analysts say the market is literally close to a saturation point.
So with that in mind, heres a critical medium-term problem for the company: itll find it hard to differentiate itself from its competitors because they all basically sell the same thing, and like many of Britains big supermarkets, Vodafone is being undercut by the smaller competitors in the market.
In recent years, Vodafone has also copped quite a bit of bad press Down Under for poor customer service and an inadequate network (which it has since tried to rectify). Its also grappling with shrinking service revenue from its main European markets.
Its looking for answers
Vodafone has cash, and there are expectations its going to become quite aggressive in its marketing. Its an old fashioned but potentially effective market penetration strategy.
Its also trying to make direct contact with customers. Last week the mobile phone company announced it had agreed to buy 140 Phones 4U stores. Itll likely use this as a channel to sign up more customers onto contracts.
Whats important to know is that Vodafone, as it stands, is currently shedding assets rather than building them. A case in point is the disposal of its 45% stake in Verizon Wireless. But the firm is also on the lookout for the right kind of investment. This year alone the group increased its cash reserves by $2.61 billion. Its estimated that Vodafone may have between 10 billion and 15 billion pounds of capacity for deals.
Bottom line, you ask? Well, its a solid company but its got some daunting challenges ahead of it. Its going to have to win over customers and make the right sort of investments moving forward. I suspect if it cant offer a superior alternative to its rivals, and make customers want that alternative, itll keep sinking ever so slowly.
For now, its okay.
Vodafone clearly has its work cut out, as do investors who want to make a cool million in the market. That’s why the Fools have put together this special free report. It’s called Your 10 Step Guide To Making A Million In The Market. It’s packed full of exactly the kind of concrete advice you need to get you started.
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David does not own shares in Vodafone.
