Vodafone has announced strong interim profits growth.
Mobile phone giant Vodafone today announced excellent interim results, showing a 24% rise in earnings to GBP3.3 billion. This was higher than expected, with forecasts of between GBP3 and 3.2 billion. The company also announced that its debt was GBP13.2 billion, which is only 8.5% of its market capitalization.
This move at first looks like a shot in the arm for the troubled telecoms industry. There is a lot of volatility currently surrounding mobile phone companies, in part due to uncertainty about the true value of the UMTS licenses they have paid high prices for (at least in the UK and Germany). In addition, it looked like a price war in the German market would hit profits, but this is now drawing to an end because Deutsche Telekom’s margins were hit even harder and it had to raise its prices.
Vodafone’s results aren’t representative of the industry, however – it is an exceptional company. By skill and luck (and selling Orange to France Telecom at a top-notch price before the crash in telecom stocks is certainly an example of both), it has kept its debt extremely low by telecoms standards – for example, BT has a debt to equity ratio (gearing) of around 100%. Vodafone also has interests in developed, successful, and most importantly, profitable, mobile businesses,such as Verizon and Mannesmann, in several very large markets, providing it with a substantial revenue stream.
The future for Vodafone is bright. Even if it turns out to have overpaid for its 3G licenses, it has managed to absorb most of the cost of these, unlike its rivals. It will not have any trouble funding future acquisitions, and as some of its competitors run into difficulty, it will be unlikely to face prolonged fierce price competition. As in the German market, if David starts a fight with a giant, it’s usually David who ends up hurt.
The renewed belief in Vodafone indicates the maturing of the telecoms market. In most industries, rather than blindly assigning high or low values to shares based on their market sector, companies have high share prices when analysts trust their management to deliver sustained growth and profitability. Other companies will do less well. Looking at the case of Vodafone compared to some of its rivals shows this maxim is now also true for telecoms companies.
