The last month has been hugely positive for investors in Vodafone (LSE: VOD) (NASDAQ: VOD.US), with shares in the telecoms company gaining almost 11% as an improving outlook for Europe has caused sentiment to shift.
Indeed, what’s fascinating about this recent gain is that news flow has not improved significantly, rather there is the potential for Europe to stabilise somewhat in 2015 and, with the promise of a QE programme by the ECB, it appears as though investors are optimistic regarding Vodafone’s prospects for next year.
However, is this shift in sentiment warranted, with Vodafone having the potential to hit 300p in 2015? Or, could it be little more than a short term bounce that sees the company’s share price tumble to 150p next year?
Eurozone Exposure
Following the sale of its stake in North American joint venture, Verizon Wireless, Vodafone is firmly focused on Europe. As a result, its future performance is highly correlated to the situation in the region. Until now, this has been a major negative for Vodafone, with its bottom line growing at a snail’s pace due simply to a lack of economic growth within its key markets.
However, with the results of the ECB’s QE programme due to be felt in 2015, it could signal the start of a changed period for the region (and for Vodafone). This may not only improve sentiment in the stock, but could also be the catalyst for profitability gains in 2015, too.
Pay-Tv Potential
With Vodafone being rumoured to be mulling over bids for Liberty Global (which owns Virgin Media), as well as Tesco’s subsidiary, Blinkbox, it seems to be serious about a move into pay-tv and home broadband in 2015. Certainly, this is unlikely to improve profitability in the short run, and will undoubtedly entail an upfront cost to create a viable offering, but it could continue to improve sentiment in Vodafone’s shares.
That’s because the combined pay-tv, home broadband, landline and mobile market (the so-called ‘quad-play’ market) could prove to be a highly appealing space for Vodafone to operate within. With more and more customers choosing to combine their various telecom and TV deals, it seems logical for Vodafone to gain exposure to this market. And, with Vodafone’s financial standing being strong, it seems to have the balance sheet to take on more debt and undertake M&A activity, which could be the catalyst to boost sentiment in the short run.
Looking Ahead
With Vodafone being forecast to grow earnings by 9% and yield 4.9% next year, it has obvious appeal as an income and growth play. However, for its shares to hit 300p, it is likely to require a major catalyst, with the two most obvious being M&A activity and an improving Eurozone economy.
Certainly, neither are guaranteed to deliver positive results for investors in Vodafone but, with the ECB’s QE programme expected to make a real difference to the wider region and with Vodafone having the financial firepower to conduct substantial M&A activity, it seems more likely that shares will hit 300p rather than 150p in 2015. As such, and while shares may not continue their recent run of a 10% gain in a month, 2015 looks bright for shareholders in Vodafone.
Of course, finding shares that can offer significant potential upside is no easy task. And, as you probably know, lacking the time to trawl through the FTSE 350 makes it all the more challenging.