<<VODAFONE UPDATEby Don Sherwood
On August 30th we recommended accumulating shares of Vodafone (VOD, $41)
beginning in late September. At the time, we forecast all-time highs (low
$60's) by December, coincident with the Christmas rush on cellular phone
service and on the heels of positive first-half results and analystupgrades.
So far, so good. Last Friday, Vodafone shares closed at $41, up 22% from
the 52-week low of $33.50 hit in late September. Friday's close is
significant, as the stock ended above its 10, 20 and 50-day moving
averages. In the same period we've seen the Nasdaq plummet to annual
lows, so we're pleased to see Vodafone showing strength in a difficultmarket.
Wall Street is rewarding Vodafone for its solid subscriber growth. In
addition, Nokia's key mobile phone division posted a better-than-expected
59% jump in sales to $4.6 billion. European sales led the increase, but
Nokia also cited strong growth in the Asia-Pacific region. The Nokia and
Vodafone results were in contradiction to weak earnings by Sprint (PCS),
Nextel (NXTL), Motorola (MOT), and Ericcson (ERICY), suggesting that Nokia
and Vodafone are taking significant market share.Let's Make a Deal --
Vodafone and Deutsche Telekom (DT, $36) reportedly are considering taking
stakes in Swisscom's (SCM, $24) wireless operations, and the rumor has
fueled Swisscom's recent share price gains. According to German newspaper
Der Spiegel, Vodafone and Deutsche Telekom will race to see who can make
the better offer for a 20% or 25% piece of the carrier, and a deal could
be announced within two weeks. Rumor has it that Vodafone is in the lead.
Swisscom Mobile increased its customer base by 19% to 2.7 million in the
first half of 2000 alone.
In other action, Vodafone apparently prevailed in its quest for Eircell,
the wireless operations of Irish carrier Eircom (EIR, $11), committing
$3.9 billion for the property. Vodafone reportedly will give shareholders
a 100% premium.
COMMENT: Vodafone continues to leverage its currency to aggressively
expand its worldwide footprint. We expect to see Vodafone buy all of
Eircell and then sell off the fixed line business, in effect trading stock
for cash. The plan is clear: buy and harvest. The Monopoly game
continues (with the winner holding licenses versus hotels (!)), and
Vodafone is buying up every property.
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2. NOKIA BREATHES NEW LIFE INTO WIRELESS ISSUES
Wireless issues went on a tear late last week after Finnish mobile phone
giant Nokia (NOK, $40) reported blockbuster earnings, a week ahead of
schedule. Company executives changed the release date due to market
volatility, most likely because they didn't want to see their stock price
fall any further (as of yesterday's close it was off more than 50% from
its June highs). The company reported a 43% rise in net income, earning
$750 million, or 16 cents a share. The results bested analyst
expectations by 2 cents a share, but fell shy of last quarter's 19-cent
profit. Revenues grew at an astounding 50% clip over last year, jumping
to over $6 billion in the quarter.
COMMENT: Nokia spooked the markets earlier this summer by issuing a
third-quarter earnings warning, citing a temporary slowdown in the growth
of handset sales. That announcement helped to spawn the virtual meltdown
in wireless valuations that we've witnessed over the last several months,
and we think today's news will have the same effect over the next few
months (albeit in a positive direction).
Nokia issued a bullish outlook for the next quarter as well as 2001,
noting that company sales are expected to grow at a 25-35% over the coming
year. Mobile phone sales, which account for almost three-quarters of the
company's revenues, increased 59% and the company said it will meet its
2001 targets of 25-35% growth in sales.
Listen to this: The company's Chairman and CEO, Jorma Ollila, estimates
that wireless phone makers will sell 400 million mobile phones worldwide
this year and that number should go up to 550 million in 2001 and 1
billion by 2002. WOW! And one more thing: Chase H&Q upgraded the stock
to "strong buy" from "buy."
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COMMENT: AT&T (T, $27) stole headlines yesterday after reporting that its
board of directors has approved a plan to split the company into four
separate parts. Although the move had been speculated for some time now,
the official announcement finally came as the company reported its
third-quarter results. The company plans to spin off its cable and
broadband business, as well as its wireless unit, sometime within the next
year. In addition, AT&T will also issue a tracking stock for its ailing
consumer long-distance division (chief rival WorldCom (WCOM, $27) will
probably do this as well). What's left? Business services and the
company's network. These will most likely remain as-is, and will operate
under the AT&T name.
We expect the move to unlock a great deal of hidden value, and it should
give a boost to AT&T's beleaguered shares. However, don't expect the
stock to skyrocket overnight, as it will take several years for this
restructuring plan to take its course. Nonetheless, the long-term
investor should be in good shape here. The stock ended yesterday down 3%.
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4. ERICSSON ANNOUNCES $1.4 BILLION ORDER
COMMENT: Swedish-based mobile communications firm Ericsson (ERICY, $12)
has struggled as of late, and ended down for the week despite announcing a
$1.4 billion order from MobilCom for a variety of wireless Internet
equipment. The news is certainly good for Ericsson, and is also a
positive for the entire wireless industry. A new wave of expansion is
about to take place as companies upgrade their existing networks to meet
the booming demand for wireless Internet services. Ericsson is certain to
profit from this trend.
However, we do not hold the company in our Wireless Portfolio at the
current time. Ericsson's profits were up nearly 70% in the third quarter,
but the firm's mobile handset business is losing money as it tries to cope
with stiff competition from rival Nokia. Although handsets are not
Ericsson's main business (mobile systems are), we don't think the stock is
going to make any big moves until this segment gets back on track.
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5. THE BULL MARKET WIRELESS PORTFOLIO TRACKER
The % change is from 10/17 to 10/24AT&T Wireless AWE $22 18%
Nextel NXTL 39 32%Nokia NOK 40 40%
Qualcomm QCOM 71 -1%RF Micro Devices RFMD 15 -6%
Sprint PCS PCS 37 24%Vodafone Group VOD 41 15%
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