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Vodafone results: Q3 earnings preview

The upcoming Q3 trading update from Vodafone will see investors less focused on revenue growth and more focused on cost efficiencies, free cash flow and dividend cover.

When is Vodafone’s Q3 results date?

Vodafone is expected to release a third quarter (Q3) trading statement on Friday 25 January 2019.

Vodafone Q3 results: What does the City expect?

The first six months of the year saw the group post a loss of €7.8 billion, primarily due to a loss realised on the disposal of Vodafone India which followed the merger completion with India Cellular. Recent merger and takeover activity, involving Liberty Global and Vodafone India, has stretched the company’s balance sheet and elevated debt levels. The associated leverage has prompted the company to halt the progressive dividend policy and rather maintain this year’s dividend payout at the same level as the previous financial year.

Markets will be looking to the upcoming trading update for clues relating to the company’s (debt) leverage and outlook in anticipation of a future return to a progressive dividend policy.

The City will want to see that Vodafone remains on track to continue reducing its net operating expenses and improving the outlook for free cash flow generation.

Earnings before interest tax depreciation and amortisation (EBITDA) growth for the group is expected to be maintained at around 3%. Italy and Spain, the third and fourth largest operations for the group, have seen EBITDA contracting in the first half (H1) of the year. Markets are expected to see a return to growth for the Italian operations in Q3 2019, supported by a general decline in market wide pricing discounts as well as price increases in Italy over the reporting period. Earnings trends are expected to continue to be pressured in Spain although maintained at the levels seen in the first half of the year.

How to trade the Vodafone results

The last 12 months have been tough for the Vodafone share price, which now trades at levels last seen in late 2009-early 2010.

The last earnings release in the H1 saw Vodafone rallying more than 7% on the day. While growth was only flat to marginally higher, it would appear the decision to maintain the dividend offering at 2018 financial year levels, despite a loss making H1 2019 of the financial year, appeased market players at least in the near term. These gains were, however, short-lived as the share price has subsequently moved back below the pre-results price.

With this in mind, increased free cash flow generation, further operational efficiencies being realised, suggestions of progressing dividend policy, as well as improvements in the Italian and Spanish markets, should they be realised, are likely to provide positive short-term upside catalysts for the share price of Vodafone. However, in the context of a pressured industry and the bear market territory the company finds itself in, traders might be eager to lock in profits quickly if generated on the buy side.

A Thomson Reuters poll of 24 analysts maintain a long-term average rating of buy for Vodafone (as of 21 January 2019), with nine of these analysts recommending a strong buy, five recommending a buy, four hold, four sell and two with a strong sell recommendation on the stock.

Vodafone results: technical analysis

A chart of Vodafone suggests that the long-term price trend for the company remains down. This is evidenced by the price trading firmly below the 200-day simple moving average (SMA).

The long-term downtrend considered, as determined by the price/200-day SMA relationship, has been in place since early February 2018.

In the short to medium term, we see the share price of Vodafone trading in a broad sideways range between levels 142p (support) and 172p (resistance). The share also trades in oversold territory whilst near the support of this range. This sideways range has been in place since the beginning of September 2018, highlighted with the white rectangle on the above chart.

Range traders might consider this as a short-term bullish trade setup, although this idea conflicts with the fact that our long-term trend is considered down.

Technical analysis shows short bias to Vodafone trades

With both the shorter-term and longer-term technical analysis indications in mind, we prefer keeping a short bias to trades, despite the consideration that a short-term rebound may be underway at present.

To find short entry into Vodafone, breakout traders might prefer waiting for a move below the 142p level as a suggestion that the short-term downtrend is aligning with the longer-term downtrend already in place. Alternatively, range traders might wait for a bearish reversal to end the price rebound (closer to resistance) before targeting a move back down towards the 142p support level.

Only if the price was to break above resistance of the highlighted range (172p) and start to trade back above the 200-day SMA (174.20p) would we start to consider a long bias to trades on Vodafone.

Vodafone earnings: markets look to Italy and Spain businesses

The Q3 2019 trading update from Vodafone will see investors less focused on revenue growth and more focused on cost efficiencies, free cash flow and dividend cover. Markets are hoping to see some signs of a turnaround in earnings for the Italian business and stability in the Spanish business.

The long-term consensus broker rating for the stock remains a buy, although the technicals suggest that this sentiment may be a bit premature in lieu of the bearish underlying long-term trend still firmly in place. Traders looking to trade the news might consider locking in profits a little quicker if realised on the long side, or be a little more patient holding onto their positions if realised on the short side.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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