Telefonica Remains Neutral - Analyst Blog
August 30 2011 - 10:45AM
Zacks
We are maintaining our long-term Neutral recommendation on
Spanish telecom giant Telefonica (TEF). For the
short term (1–3 months), the stock retains a Hold rating with a
Zacks #3 Rank.
We believe continued investments in the expansion of broadband
services (both fixed and wireless) are expected to offset some of
the difficulties emerging from the depressed domestic market.
The weak Spanish market has resulted in customers switching to
cheaper offers from Telefonica’s competitors. The economic downturn
in Spain has lasted longer than expected, taking a toll on 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 through 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
and regulatory involvement might limit the upside potential of the
stock.
On the positive, Telefonica continues to sustain its top-line
performance in 2011, as the momentum in Latin America and Europe is
compensating for 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 for
Telefonica, especially Brazil.
Brazil is expected to become the major source of revenue
following the integration of the fixed and mobile businesses. The
consolidation of two Brazilian units Vivo Participacoes and
Telecomunicacoes de Sao Paulo SA (VIV) would
generate synergies of €3.7–4.6 billion, up from the previous
expectation of €3.3–4.2 billion.
Telefonica Europe is gaining market share from increasing
smartphone penetration and data growth. The company continues to
prepare the ground work for future growth by improving network
capability to support mobile data services.
In the first half of the year, stiff competition in the
company’s domestic market and increased operating expenses led to
lower net income compared with the year-ago period. However,
revenue improved on account of double-digit growth in Latin America
and Europe, which partially countered the weak operations in
Spain.
TELEFONICA S.A. (TEF): Free Stock Analysis Report
TELECOM DE SP (VIV): Free Stock Analysis Report
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