Why Vodafone just slumped to three-month low

In contrast to the bullish update in November, Vodafone injected a note of caution for investors today after a competitive quarter of trading in Europe.

Spain and Italy were a particular issue as European growth moderated to 0.3% in the three months to December 31, despite a robust performance in Germany and a continuation of steady revenue trends in the UK.

While there doesn't appear to be any shift in the investment case, shares retreated by more than 4% today to leave Vodafone back where it stood prior to its impressive half-year results.

The figures in November were accompanied by CEO Vittorio Colao upgrading guidance on underlying earnings growth in 2018 to around 10%, compared with the 4-8% previously forecast. It was the first time in many years that Vodafone had been able to increase its guidance.

This prompted a 5% surge in Vodafone's share price as analysts including UBS's Polo Tang placed a 270p target on the stock and noted additional support for a 6% dividend yield through better-than-expected free cash flow.

Barclays still has its 280p price target, despite today's mixed third quarter update. They said momentum had been maintained, with organic service revenue growth in line with consensus expectations at 1.1% higher.

Growth in Spain slowed to 2% from 3.9% in the previous quarter, although this disappointing result was blamed on aggressive promotions by competitors as Vodafone experienced higher rates of churn in both mobile and fixed broadband.

Service revenues declined by 0.4% in Italy, but Vodafone said the decline from 1.5% growth in Q2 was due to the lapping of mobile tariff changes the year before.

Underlying trends in the UK were stable at 0.4% higher, with improvements in consumer mobile and fixed line being offset by a slowdown in Enterprise due to project phasing.

While Vodafone has continued to grow strongly in UK broadband, the market is increasingly worried that it is doing so at the expense of TalkTalk Telecom. Its shares slumped to an eight-year low yesterday after Exane BNP Paribas published a note warning of a hefty dividend cut in the next year.

Vodafone said it had just experienced its best ever quarter of consumer broadband net additions, with 39,000 new households meaning it now serves 316,000 customers.

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