BofA Downgrades Vodafone, Says European Telecom Faces Short-Term Downside

Vodafone Group VOD faces many headwinds to warrant a positive rating, according to Bank of America Merrill Lynch. 

The Analyst

Bank of America analyst David Wright downgraded Vodfaone from Buy to Neutral and lowered the price target from $260 to $202.

The Thesis

Vodafone has downside risk from competitive pressures in Spain and Italy, as well as raised spectrum costs, Wright said in the downgrade note. (See the analyst's track record here.) 

BofA expects below-consensus growth, down from at least 9 percent to 1 percent. 

Vodafone's long-term catalysts are more constructive, Wright said.

“We regard the [Liberty Global] deal as strategically sound and [greater than] 10-percent free cash flow accretive by year three [2022]. Meanwhile,there are seeds of recovery in the Netherlands JV," the analyst said. "Activism is another potential positive, albeit unconfirmed, with tower sales as a means to alleviate gearing and potentially a welcome change in cash distribution."

Asset writedowns and dividend cuts are appropriate in light of the company’s overvaluing and over-distributing, Wright said. While this is unlikely, the scenario could be forced if growth slows further ahead of rising leverage and higher-than-average (and unavoidable) capex." 

Price Action

Vodafone shares were trading down more than 3 percent at the time of publication Thursday at $22.28. 

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Photo courtesy of Vodafone.