Verizon reported a fourth quarter earnings miss yesterday, but showed strong revenue growth on the wireless side. Vodafone, which owns a 45% interest in Verizon Wireless, saw bullish option activity ahead of its own earnings as a result. The biggest trade of the day was the purchase of 912 July 27 calls for $0.70 each, with the stock at $25.88. This is a bullish bet that will profit if Vodafone is above $27.70 (7% higher) by July expiration.
Vodafone's stock had a lackluster 2012, closing nearly unchanged on the year. However, at current levels, the stock pays a hefty 6% dividend, which is a higher yield than both AT&T and Verizon.
Vodafone trades at a discount to AT&T and Verizon because of its exposure to the recession in Europe, as well as its $2.2 billion tax dispute in India. But Europe appears to have put the worst behind it, and the company looks close to settling the tax dispute with the Indian government. Once the uncertainty around the tax dispute is settled, shares are likely to rise, as they will have a big burden lifted off of their shoulders.
In other words, the very catalysts that have caused Vodafone to lag other major Telecom firms are precisely the ones that could drive its share price higher this year. By dint of their exposure to emerging markets like India and a recovering Europe, not to mention their ownership 45% of Verizon Wireless in America, Vodafone will be able to profit from an expanding global economy.
The 45% stake in Verizon Wireless alone should drive price appreciation in Vodafone. Verizon Wireless revenue increased 9.5% last quarter, to $20 billion. Vodafone receives 45% of this revenue, and can use it as it sees fit. In the past, Vodafone has used it to pay special dividends, but last November it announced that it would use it to buy back shares. Since then, the stock has rallied 4% off of its 2012 low around $25.
The main risk for Vodafone shareholders is still sluggish European growth. Though it looks like the worst may be behind Europe, Vodafone continues to lose money in Italy, Spain, and Greece. The company continues to implement cost-saving measures, but there is no guarantee that those arms of the company will return to profitability in 2013.
Therefore, the way to play Vodafone is to buy longer-dated upside calls. This keeps risk fixed, and allows you to participate in the appreciation of the shares. If, come July expiration, the company's European operations have continued to improve – and there is a fair settlement in the Indian tax dispute – the calls are likely to be in the money, and can be exercised into stock. You can then hold this stock for its solid dividend and growth potential.
Disclosures: None to report.
Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."
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