Vodafone (NASDAQ: VOD ) shares dropped 5% on the fourth-quarter earnings release, providing investors with an ideal entry point. After the disposal of Verizon Wireless to Verizon Communications (NYSE: VZ ) , investors got a view into the stand-alone operations of the mostly European and India wireless operator and the market didn't like that initial view of Vodafone. It's important for investors to step back and assess the situation now.
Hammered by Europe
Results for Vodafone from the fourth quarter that ended in March were greatly affected by a European market that remains extremely weak. Organic service revenue in the region plunged 9.1% from the prior-year period, pushing down full-year revenue by nearly 4%.
Even so, some encouraging trends are starting to emerge with the rollout of 4G services across most of the European regions. Vodafone had only 4.7 million 4G customers covering 14 markets, providing for substantial upside going forward. In total, Europe's smartphone penetration has only reached 45%. Mobile in-bundle revenue grew by nearly 8% for the quarter, providing more signs that converged offerings will provide Vodafone a leg up on the competition.
A new focus for shareholders
With the Verizon Wireless deal and subsequent capital distributions to shareholders out of the equation, investors can now focus on the value proposition offered by the stand-alone company.. For the year ended on March 31, Vodafone produced adjusted EBITDA of $21.4 billion, based on the currency conversion. With the sharp drop of the stock price since the conclusion of the asset sale to Verizon and stock buyback, Vodafone has a market cap of roughly $91 billion and an enterprise value of around $117 billion after adding in the limited debt..
Vodafone shares were probably down in part due to the fiscal year 2015 guidance of EBITDA in the range of roughly $19.5 billion on average. Even this lower forecast compared to the previous year is based partly on the increased spending for the Project Spring investments for 4G coverage in Europe and 3G networks in emerging markets like India. The valuation provides investors a very attractive enterprise multiple of EBITDA at around 6 times company guidance.
With over $109 billion in debt, Verizon now trades at an enterprise value of around 7 times EBITDA forecasts. Remember that Vodafone substantially reduced debt from the cash received in the Verizon Wireless deal making the comparison to enterprise values more relevant. The lower EBITDA multiple and weak European economy provides more long-term upside for Vodafone.
Vodafone provides a very attractive investment opportunity, especially for those investors who think Europe will eventually turn around. The company is aggressively investing in 4G networks and cable operators to offer converged services and bring the continent up to par with the U.S. wireless market. The current results only provide a snapshot of the continuing depressed operating environment on that continent.
On the flip side, Verizon offers access to the strong market for wireless and data services in the U.S that is facing increasingly tougher competition from reinvigorated wireless providers and merged cable operators planning to expand broadband offerings. The investment decision seems clear with Vodafone trading at a lower EBITDA multiple.
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