The Vodafone (LSE:VOD) share price has fallen during the last decade as the corporate has struggled to earn a good return on heavy capital investments. However issues appear to be shifting in the correct path.

With approval to merge its UK operations with Three and the sale of its Italian enterprise full, Vodafone seems to be to be in a stronger place. So ought to traders take into account shopping for the inventory whereas it’s down?

Scale

Vodafone’s enterprise faces two large structural points. The primary is that it operates in an trade the place capital necessities for constructing and sustaining infrastructure are excessive.

The corporate has to search out methods to earn a return on its investments, however it faces an extra problem in attempting to do that. The issue is that clients are principally influenced by price.

Mixed with low switching prices, this implies Vodafone can’t simply enhance costs to clients to spice up its earnings. And this places the enterprise in a troublesome place.

If it may possibly’t generate extra cash by elevating costs, the one technique is to carry down its prices. And that’s what the corporate is attempting to do with some latest restructuring strikes. 

Ins and outs

Vodafone has lately accomplished the sale of its operations in Italy. In doing so, it raised round £6.6bn in money, which it plans to make use of for debt discount and shareholder returns.

The money returned to traders ought to complete round 7.5% of the present market cap. Extra importantly, the sale ought to take away the agency’s must spend money on a market the place it has struggled to earn a good return.

Within the UK, Vodafone’s bid to merge with Three has been authorised by the regulators. This could increase its buyer base considerably, permitting it to earn a greater return on its current infrastructure.

Each strikes look optimistic for the corporate over the long run. However there are some things I believe traders contemplating shopping for the inventory must be cautious of going ahead.

Ongoing points

Regardless of the latest progress, I believe the market remains to be proper to be unconvinced by Vodafone shares. There are nonetheless some ongoing points that make me sceptical in regards to the inventory as a chance.

Arguably, the corporate’s greatest drawback is in Germany. Growing costs is – unsurprisingly – resulting in decrease buyer numbers and revenues are declining within the area because of this. 

Round a 3rd of Vodafone’s gross sales come from Germany, in comparison with lower than 20% from the UK. So I’m uncertain that increased returns following the Three merger can offset decrease gross sales elsewhere.

Lastly, the agency is dedicated to some vital capital investments within the UK’s 5G community as a part of its deal to merge with Three. So it may be some time earlier than traders see the returns.

Time to purchase?

Arguably, there has by no means been a greater time to purchase Vodafone shares within the final 10 years. However I’m nonetheless not drawn to the inventory from an funding perspective.

Whereas there are encouraging indicators – and I believe these are real positives – there are nonetheless large ongoing challenges. So I believe there are higher alternatives for traders to have a look at elsewhere.