Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at Vodafone (LSE: VOD) (NASDAQ: VOD.US) to ascertain if it can make £10bn in profit.
Have we been here before?
A great place to start assessing whether or not Vodafone can make £10bn in profit is to look at the company’s historic performance. Unfortunately, Vodafone has not been able to make £10bn at any point during the past five years and I believe that the company is going to struggle to do so in the future. Indeed, the closest Vodafone has come during the past five years to hitting my profit target was back during 2010, when the company reported a net profit of £8.6bn.
However, during the past few years Vodafone has been increasingly reliant on its US joint venture, Verizon Wireless to boost profits, as Vodafone’s legacy telecoms business struggles with falling voice and text massage revenues. In particular, income from Vodafone’s share in Verizon Wireless has contributed around 50% of Vodafone’s net profit in each of the last four years. Sadly, now Vodafone has disposed of its Verizon Wireless holding, it’s likely that the company’s net income will suffer.
But what about the future?
Still, Vodafone will able to use the cash from the sale of its share in Verizon Wireless to fund expansion into other markets, reducing the company’s dependence on the traditional telecoms business. For example, it has been widely speculated that Vodafone will spend its new-found wealth by acquiring Spanish cable company, Ono worth around £5bn. In addition, there are rumours that the company will make a move on Italy’s Fastweb.
Further, many City analysts expect that a tie-up between BSkyB and Vodafone is likely, although a complete takeover is likely to run into much opposition. Nevertheless, all these planned acquisitions will reduce Vodafone’s dependence on the traditional telecoms market, allowing the company to expand into faster growing, more lucrative markets like pay-tv.
Foolish summary
All in all, even though Vodafone now has plenty of cash to enable it to expand into new markets, the sale of its share in Verizon Wireless is going to impact the company’s bottom line significantly. With this being the case, I feel that Vodafone cannot make £10bn profit.