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Morning Update

Yesterday a week of big tech earnings was kicked off with Google, who beat expectations and is seeing its shares higher by 5%. IBM is also higher by 5% after a solid fourth quarter. Today after the close Apple will report, the outcome of which could reveal the stock’s trend for the coming months. Beside this traders will be watching for news that Congress will pass a bill to raise the debt ceiling until May. The deal would be tied to a provision that will suspend the pay of lawmakers if a budget deal is not reached by April 15th. This deal would move much of the risk in the market out to the April options cycle and would likely be accompanied by a selloff in February and March VIX as hedges roll into April option positions.

Yesterday Verizon reported a fourth quarter earnings miss but showed strong revenue growth on the wireless side. Vodafone, who 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 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 a $2.2 billion tax dispute in India. But Europe appears to have 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 them.

The very aspect about Vodafone that has caused it to lag other major Telecom firms is therefore exactly what could drive its share price higher in the future. By being exposed to emerging markets like India and a recovering Europe, not to mention owning 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 posted a 9.5% increase in revenue 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 announced it would use it to buy back shares. Since then the stock has rallied 4% off of its 2012 low around 25.

The risks to owning Vodafone remain 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 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 and held for their solid dividend and growth potential.


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