On Jul 3, 2014, we issued an updated research report on Telefonica, S.A. (TEF). The company’s top and bottom line deteriorated from the year-ago results. Currently, the Zacks Consensus Estimate for 2014 earnings is pegged at $1.07, representing a decline of 22.3% year over year.
We expect Telefonica to deliver strong revenues and profits on increased commercial activity, faster adoption of smartphones, expansion of mobile broadband services and cost-cutting initiatives. For 2014, the company is retaining its focus on enhancing network capacity to support data traffic growth and build network differentiation by developing high-speed infrastructure. The company has undertaken several efforts to enhance efficiency across European markets, such as removal of handset subsidies in Spain, gradual reduction of subsidies in the U.K., network sharing agreement in the U.K. and Mexico, and redundancy program in Spain. Such initiatives should lead to further savings in the coming years and boost profits.
Latin America remains one of the best performing regions for Telefonica, especially Brazil. The company continues to lead the Brazilian market by expanding its LTE network and fixed broadband services through its subsidiary, Telefonica Brasil, S.A. (VIV). In addition, the company is focusing on addition of high value customers, thus improving its ARPU prospect. Telefonica is also increasing its foothold in other regions like Argentina, Peru, Chile, Venezuela and Columbia by prioritizing the adoption of both mobile and fixed broadband services on the back of cheaper devices, tiered pricing and enhanced network capacities.
However, for 2014, Telefonica expects revenues to decline 0.1% while OIBDA margin will likely see an erosion of 0.4%. In addition, we believe that Telefonica will face increased churn rates (customer switch) and reduced Spanish revenues due to the ongoing MTR reductions which is the fee charged by operators for connecting calls.
Further, the unanticipated economic downturn in Spain is likely to affect the company’s profits and liquidity. Though the Spanish market is recovering gradually, the lingering effects of the Euro-zone crisis continue to affect the company’s performance. Domestic competition remains a major concern as the unbundled local loop (ULL) regulation is forcing Telefonica to open its network to alternative providers. ULL regulation, coupled with increased exposure of direct access competitors, continues to be a primary reason behind wireline telephony access erosion.
Telefonica currently has a Zacks Rank #3 (Hold).
Other Stocks
BT Group plc (BT) and Telecom Corporation of New Zealand Limited (NZTCY) are the two stocks with a Zacks Rank #1 (Strong Buy), which can be considered in this sector.
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