After solid half-year earnings and rumours of merger and acquisition (M&A) deals, the question on investors’ lips will be whether the Vodafone [VOD] share price can carry this momentum going into the company’s upcoming earnings release.
The company is expected to report its third-quarter 2022 trading update on 2 February. Ahead of the announcement, the Vodafone share price closed at 130.48p on 31 January, up 13% since the start of the year.
Can new deals lift the Vodafone share price?
The Vodafone share price trended downwards in the second half of 2021, but has recently recovered much of those losses. At the close on 31 January, the stock was up around 3% from a year ago, though it currently sits around 8% lower than the 52-week high of 142.74p it reached in May.
Speculation that Vodafone will buy Three UK from Hong Kong-listed conglomerate CK Hutchison (0001.HK) – first reported on 22 January – gave the stock a boost. When markets opened on 24 January, the Vodafone share price reached an intraday high of 125.24p – its highest level in seven months. If the deal were to happen, then it would add around 9.3 million customers to Vodafone’s existing 20 million customer base.
Vodafone is also said to be in talks with French telecoms company Iliad about merging both companies’ Italian operations. In addition, Europe’s largest activist fund Cevian Capital is pushing for further restructuring of Vodafone’ s portfolio to enhance its strategy in key markets.
The activist fund has bought an undisclosed stake in the FTSE 100 group to encourage consolidation efforts in Europe, reported the Financial Times on 31 January. Investors appeared to react positively to the news, with the Vodafone share price climbing 3% in early trading on 31 January, before closing the day above 130p.
Vodafone increases expectations after promising half-year revenue
In November, Vodafone reported half-year group revenue of €22.4bn, up 5% from the €21.4bn posted in the first half of 2021. Group service revenue was up 2.8% year-on-year. Meanwhile, adjusted core earnings were up 6.5% from roughly €7bn to €7.5bn.
On the back of the half-year profits rise, the company increased its full-year earnings guidance to between €15.2bn and €15.4bn, whereas the lower end of the range had previously been €15bn. The free cash flow target was bumped up by €100m to at least €5.3bn.
Vodafone CEO Nick Read said that the results demonstrated “sustainable growth and solid commercial momentum”. He added that “our strengthened performance in Africa and Europe puts us on track to be at the top end of our guidance for this year, as well as firmly within our medium-term financial ambitions”.
The key priorities for Vodafone’s strategy include strengthening its position in Germany and accelerating operational transformation in Spain. “We're regaining commercial momentum across our European consumer business,” Read said on the earnings call. The half-year report “demonstrates the sustainable growth engine that we're building at Vodafone,” he added.
Q3 results will reveal European strategy and debt picture
According to analysts at Hargreaves Lansdown, pressures remain on the balance sheet. Net debt rose from €43.8bn in the first half of the fiscal year 2021 to €44.2bn in half-year 2022. “Vodafone still has work to do before it can be said to be in rude health,” the analysts commented.
The Q3 results should provide investors with an update on Vodafone’s European strategy and its debt picture for the second half of the year. The analysts stress that getting debt under control is crucial as “Vodafone’s bull case has long been on an attractive dividend”.
“The question now is whether the sharper focus on the European consumer markets can help the group grow shareholder returns over time,” they added.
The Q3 update might also be used to confirm the Three UK merger reports – or at least inform investors of any talks.
In the days leading up to the half-year announcement, Read hinted at M&A activity, including a possible merger with Three UK. “I’m firmly supportive of consolidation on the right terms,” he told the Times in November 2021, the first interview he had given as Vodafone CEO since taking on the position in October.
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