Telefonica Lowered to Neutral - Analyst Blog
May 31 2011 - 12:11PM
Zacks
We are downgrading our long-term recommendation on Spanish
telecom giant Telefonica (TEF) to Neutral from
Outperform due to difficulties emerging from the depressed domestic
market. For the short term (1–3 months), the stock retains a Sell
rating with the Zacks #4 Rank.
The weak Spanish market has ended up with customers switching to
cheaper offers from Telefonica’s competitors. The economic downturn
in that country has been longer than expected and is likely to drag
the company’s profits and liquidity.
In addition, the company’s Spanish revenue continues to be
affected by the ongoing reduction in mobile termination rates,
which is the fee that operators charge each other to connect
calls.
Telefonica expects its operating margin to decline slightly over
the three-year period (2010-2013) from 38% earned in 2010, but to
remain above the mid point of the 30–40% range. Further, the
company’s highly leveraged balance sheet, increasing competition
(especially in Brazil and UK) and regulatory involvement might
limit the upside potential of the stock.
On the other hand, Telefonica continues to sustain its top-line
performance in 2011, as the momentum at Latin America and Europe is
compensating revenue declines in Spain. Thus, Telefonica is
confident that annual revenue will grow at least 1% to 4% through
2013. Latin America remains one of the best performing regions and
the principal growth market for Telefonica.
In the recently concluded first quarter, stiff competition in
the company’s home market and increased operating expenses led to
lower net income compared with the year-ago quarter. However,
revenue improved on account of double-digits growth at Latin
America and Europe, which partially offset weak operations in
Spain.
We believe Telefonica’s strong performance in Latin America,
particularly Brazil, increased adoption of mobile broadband and
continued investments in the expansion of broadband services (both
fixed and wireless) are expected to fuel revenue and earnings going
forward.
Telefonica is particularly well positioned in Brazil and Mexico,
and is actively gaining market share from its dominant competitor,
America Movil (AMX). Additionally, the integration
of Vivo Participacoes (VIV) enables
Telefonica to offer full competitive bundled services and
strengthens its competitive position relative to its rivals.
Further, we are impressed with the company’s healthy balance
sheet as well as commitment to generate strong annual revenue and
deliver increased shareholder returns. The company reiterated its
commitment to pay €1.75 per share as dividends in 2012. Telefonica
also plans to distribute at least the same level of dividend in the
years ahead.
Given the pros and cons, we prefer to move to the sidelines for
now.
AMER MOVIL-ADR (AMX): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis Report
VIVO PARTICIPAC (VIV): Free Stock Analysis Report
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