Spain Hurting Telefonica - Analyst Blog
June 06 2011 - 8:30AM
Zacks
Spanish telecom giant Telefonica (TEF) is
suffering a continuous decline in its domestic market share due to
a sluggish economy. The customers are switching to cheaper offers
from smaller rivals, leading to lower revenues and earnings for the
company.
Spanish operations were weak again in April following lackluster
performances in the first quarter of 2011. In the first quarter,
net income was hit by an uninspiring domestic market, both in the
wireline and wireless businesses.
It is worth noting that Telefonica leads the Spanish mobile
market, which includes both mobile phones and datacards. The
company is persistently losing share in the mobile market, with
41.34% in April as compared with 41.46% in February and 41.58% in
January.
In April, Telefonica lost out to its rival, Yoigo, a unit of
Sweden’s Teliasonera AB, which added 40,080 customers in the month.
Telefonica’s mobile subscriber base fell by 41,510 from the last
month. In a season of losses, Vodafone Plc (VOD)
shed 131,120 customers and France Telecom SA (FTE)
also lost some customers during the month.
We believe Spain is not working in favor of Telefonica. The
lingering economic downturn in that country, much longer than
apprehended, 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.
However, 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 stem some of the
rot in the domestic operations. 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 peers.
We recently downgraded our long-term recommendation on
Telefonica to Neutral from Outperform owing to the depressed
domestic market. For the short term (1–3 months), the stock retains
a Sell rating with a Zacks #4 Rank.
AMER MOVIL-ADR (AMX): Free Stock Analysis Report
FRANCE TELE-ADR (FTE): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis Report
VIVO PARTICIPAC (VIV): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
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