After all the upheaval regarding the sale of Vodafone’s (LSE: VOD) (NASDAQ: VOD.US) stake in the joint venture between it and Verizon Communications, it may be tough to work out what the future growth prospects are for Vodafone.
Certainly, the sale of what could be argued was the company’s best-performing asset is likely to dampen growth in the short term at least. Furthermore, the distribution of a significant proportion of the sale proceeds to shareholders means that Vodafone has less capital to drive growth than it perhaps ought to have.
Therefore, is Vodafone likely to deliver strong growth in future? Or, after selling its stake in Verizon Wireless, is it no longer a super growth stock?
Bargains
Vodafone seems to be intent on adding to its European empire. For instance, it recently agreed to purchase Spanish cable TV and internet provider, Ono, for just over €7 billion. This follows the purchase of Kabel Deutschland for €7.7 billion last year and shows that the company sees a lot of value in Europe. That seems to be a plausible argument, since the European economy has been hit extremely hard in recent years and many European-focused companies are trading at very depressed prices. In other words, there are bargains to be had.
Diversification
Since it lost a large degree of geographic diversification with the sale of its stake in North-American focused Verizon Wireless, the fate of Vodafone is much more closely aligned with that of the European economy. This means that Vodafone is highly dependent upon the economic performance of a region that, although cheap, is not performing as well as other regions across the globe.
The key question for Vodafone, then, is how will the European economy perform in future? If it shrugs off the disappointment of the past few years and is able to deliver moderate levels of growth, then this could filter through to Vodafone. However, if the performance of Spain and other southern European countries continues to disappoint, then Vodafone could struggle to post respectable growth levels. Vodafone is clearly betting that it will be the former and not the latter.
Looking Ahead
Of course, Vodafone still has the scope to make further acquisitions. Its balance sheet is not highly indebted and a possible way to grow could be through further acquisitions. The scope to do this on a large-scale, as well as the potential for improved performance in Europe, means that although Vodafone’s future growth could contain a few ‘lumps and bumps’, it still has the potential to deliver strong earnings growth over the medium to long term. As a result it’s still a super growth stock — especially for longer term investors.
