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Tuesday, January 22, 2013

Vodafone shakes off disappointing figures from US partner Verizon, but FTSE rally fades

Mobile group has volatile day but ends higher on hopes for Verizon Wireless dividend

Vodafone sent out mixed signals to investors, although it shook off initial weakness to close virtually unchanged.

Its shares fell back to around 160p after Verizon, its US wireless joint venture partner, missed expects by reporting reported a $1.93bn quarterly loss, hit by pension liabilities and charges related to superstorm Sandy. The wireless business, however, reported an 8.5% rise in revenues, and Verizon Wireless is due to pay an $8.5bn dividend to its two parents, so Vodafone recovered to end the day 0.15p higher at 162.4p.

The future of the joint venture has long intrigued investors, with speculation either party could buy the other out, or even that Verizon could buy the whole of Vodafone and sell the parts it does not want.

But there are also concerns about the outlook for Vodafone. Before the Verizon figures, analysts at Jefferies cut their target price from 180p to 155p, saying:

Our 29 June downgrade was predicated on concerted competitor fight-backs threatening margin guidance and undue reliance on [its US joint venture] Verizon Wireless to sustain dividend per share growth. The third quarter management statement is likely to reveal competitive conditions worsening again. Even flat dividend per share post-2013 now looks challenging. The urgency of fixing strategic weaknesses in the core may force Vodafone to accept an unsatisfactory Verizon Wireless endgame.

Vodafone can expect ongoing dividends from Verizon Wireless but it really needs to preserve this cash to fund strategic acquisitions. There is a potentially expensive check-list of weaknesses to be addressed. Moreover there are realistic downside scenarios even to our free cash flow base case. In anticipation, it might be sensible for Vodafone to pull 2014 dividend per share expectations back a bit and indicate that it would, if possible, top up with buybacks as the cash flow position gets clearer.

More positive was Liberum Capital, which issued a buy note based on recent falls in the pound and hopes of a resolution to a tax dispute in India. Analyst Lawrence Sugarman said:

A 1% change in the euro impacts operating profit for Vodafone by £40m and 1% change in the dollar impacts operating profit by £50m. If you assume the recent move holds relative to my assumptions then the earnings per share upgrade would be around 3%. Of course the valuation impact is lower because Vodafone hedges its overseas operations through its debt exposure. However the market tends to react to Vodafone earnings per share momentum and anything that improves sentiment should be relevant given the compelling valuation case around Vodafone's sum of the parts. Historically Vodafone tends to perform better when euro is strengthening versus sterling than the reverse.

On Indian tax, he added:

There is always a lot of press on this issue and frequently it comes to nothing but [there have been] encouraging headlines today. I am assuming a £2.5bn payment, which implies Vodafone all tax owed and some interest; anything lower would obviously be helpful.

Overall the FTSE 100 edged down 1.81 points to 6179.17, as investors decided to cash in some profits after the market's recent rally. The Bank of Japan, as had been rumoured, unveiled monetary easing, while there were positive comments from the Eurogroup meeting about Spain and Greece with a possible bailout for Cyprus in March. The US is due to vote on Wednesday on a proposal to raise the debt ceiling for three months to allow time for a full agreement. Ahead of that came some disappointing existing home sales figures.

Fresnillo fell 50p to £17.25 after the Mexican silver miner said silver production would be stable in 2013, and confirmed it was looking to increase its 25% free float by the end of the year, to ensure it remains in the FTSE 100 after recent rule changes.

But investors were unsettled by suggestions Mexico could bring in a royalty on net profits towards the end of the year.

Publisher Pearson continued to fall back following Monday's downbeat trading statement, with Deutsche Bank and Jefferies both cutting their price targets. It closed 21p lower at £11.81.

Banks were weaker, not helped by talk of a possible warning from Deutsche Bank. Royal Bank of Scotland was down 4p at 362.9p while Lloyds Banking Group lost 0.38p to 52.82p.

But BG, which has been recovering after last October's warning on 2013 output and has also been the subject of bid talk, continued its rise, up another 25.5p to £11.45.

Weir was in demand, with the pumping specialist's shares up 18p to £19.68 ahead of an update from US peer Baker Hughes on Wednesday.

Shire added 17p to £20.88 as Credit Suisse picked the pharmaceutical group as one of its buys, even as it trimmed its rating on the UK market. The bank said:

The FTSE 100 is a defensive market (by sector composition) and thus tends to underperform when economic lead indicators and global equity markets rise (we remain positive on equities and the global economy on a 3- to 6-month view).

However it remained overweight on the UK, partly because of the weakness of sterling helping exporters.

A number of retailers were lifted by Exane BNP Paribas. The bank raised its target on Next, up 61p to £40.31, by 8% to £40 and Kingfisher, 4.1p better at 273p, from 320p to 350p.

But Shore Capital was negative on the general retailers, and it was the weak pound again. Analyst Gerard Lane said:

Another reason to sell the sector is the fall in sterling, in our view. With the rise in sterling of 2012 depressing import inflation pressure, we suggest that the decline in sterling in recent weeks is likely to lead to higher prices in the shops, or lower margins pressure for the retail sector, as import prices are likely to rise. With weakness in the UK economy putting downward pressure on sterling's value, then the general retail sector could continue its recent underperformance, given the weakness in take-home pay in the UK and the sector overvaluation when viewed through the prism of relative dividend yield.

Among the mid-caps Ocado jumped 5.95p to 101p as it unveiled Sir Stuart Rose as its new chairman to replace Lord Grade.

Property website Rightmove rose 44p to £15.99 as UBS upgraded from neutral to buy and raised its price target from £16 to £18. UBS said:

Rightmove has always had a very attractive competitive profile, with high market share, barriers to entry, pricing power, and long term structural growth. The recent Zoopla merger [with Digital Property Group] has led some investors to question the sustainability of the competitive backdrop. Our analysis of viewing data shows Rightmove remains as strong as ever. There is always a competitor to worry about. One such competitor, PropertyLive has just closed down and that was free to advertise.


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