As some readers might have noticed, I've been bullish on the telecom sector for a while now, attracted by either the exceptional growth rates posted by emerging market wireless giants such as American Movil (NYSE:AMX) and China Mobile (NYSE:CHL) or by integrated operators like Chunghwa Telecom (NYSE:CHT) and BT Group (NYSE:BT). The latter offer both the safety of a hefty dividend and the prospects of accelerated growth going forward -- as the more traditional players adopt new technologies.
Well, it's time to add another iron to the proverbial fire: Vodafone Group (NYSE:VOD). The UK-based mobile behemoth finally -- after the much-publicized trials and tribulations of the past few years -- looks ready to benefit from its global leadership position in the mobile market, the accelerating adoption of 3G services worldwide, and a very reasonable valuation.
Vodafone
Vodafone is the world's leading mobile operator when ranked in terms of revenue (roughly $52 billion for the fiscal year ended March 2006) and the second largest in terms of its subscriber base -- behind only China Mobile -- offering wireless services to roughly 191 million customers in more than 26 countries. Vodafone is generally one of the top two wireless operators in the majority of the countries it serves and is disciplined about exiting nations where it doesn't have a competitive advantage (the company's recent sale of its Japanese operations to Softbank Japan for a cool $15.6 billion comes to mind).
One of the crown jewels of Vodafone's empire is its 45% stake in Verizon Wireless, the joint venture formed with Verizon Communications (NYSE:VZ) back in April 2000. Verizon Wireless is the second largest wireless operator in the U.S., serving more than 57 million customers and holding more than 25% share of the domestic market. While it's idle to speculate on the fair value of this venture, it's interesting to note that Verizon offered Vodafone $38 billion this past May to part with its stake -- and was rejected. In fact, most Street analysts now put a sales figure on Vodafone's stake at well north of $50 billion. In any case, Vodafone's management has recently made it clear that it doesn't expect to sell out anytime soon. That's a wise move, as the market for higher-margin 3G services (short for third-generation services like downloads, email, and video) is just getting rolling in the U.S.
Rollout of 3G services
In the simplest terms, Vodafone is ahead of its rivals in preparing for the wild and wooly world of 3G wireless services. Over the past four years alone, Vodafone has spent more than $27 billion buying 3G wireless licenses in countries around the globe and has been spending an average of 40% of its capital expenditure budget on building out its 3G network. As a result, Vodafone currently offers 3G services in 13 countries, well ahead of its nearest rival, and in a capital-intensive business like this, that's a significant competitive advantage. I would also like to mention that Vodafone's customer base is primarily in the U.S. and Western Europe, where wireless penetration is high and people generally have a high level of disposable income. Since initial studies seem to show that subscribers already using 3G services (like music video downloads) spend 60% more than users of 2.5G services (ring-tones, text news, etc.), Vodafone should be sitting in the catbird seat over the next few years as customers naturally migrate to these higher-margin services.
Valuation
At a recent price of $27 per ADS, Vodafone currently trades at roughly 12 times forward earnings estimates of $2.16 per share. Given the company's global leadership position, the potential of upside earnings surprises from accelerated adoption of 3G services, and its tasty dividend, I believe investors should consider ringing up Vodafone's financials and taking a look for themselves.
Vodaphone
is an Inside Value recommendation. Try out a30-day trial subscriptionto see whether bargain-hunting is right for you.
Chunghwa Telecom is anIncome Investorpick.
Fool contributor Will Frankenhoff is enjoying his time writing for The Fool more than playing golf and reading The Financial Times. He welcomes your feedback. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.
