On Mar 10, 2015, we issued an updated research report on Telefonica, S.A. TEF.
Favorable factors like widespread adoption of broadband and data services, pricing revision, network enhancement and strategic collaborations are expected to benefit Telefonica over the long haul. However, over the short term, we remain on the sidelines considering the slow recovery in Europe, heavy capital expenditures, effects of reduction in mobile termination rates (MTR), a highly leveraged balance sheet and intensifying competition.
Though the Spanish market is recovering gradually, the lingering effects of the Euro-zone crisis continue to affect Telefonica’s performance in the country. The company’s revenues in the nation declined 4.9% and operating income before depreciation and amortization (OIBDA) fell 3.3%. Also, domestic competition poses a major hurdle as the unbundled local loop (ULL) regulation is compelling Telefonica to make its network available to alternative providers.
For 2015, Telefonica expects total year-over-year revenue growth of 7% while OIBDA margin will likely stabilize with an expected annualized erosion of 1%. In addition, we expect Telefonica to face increased churn (customer switch) and reduced Spanish revenues owing to MTR fee reductions which is charged by operators for connecting calls. Further, the unanticipated economic downturn in Spain is likely to affect the company’s profits and liquidity going ahead.
On the other hand, Telefonica’s acquisition of E-Plus has positioned it as the largest mobile service provider in Germany in terms of subscriber count. In the month of October, the company entered into a formal agreement with Vivendi to purchase the latter’s broadband arm GVT in Brazil for around $9.3 million. As per the deal, Telefonica will pay Vivendi $6 billion in cash and acquire $578 million of GVT’s debt obligation along with offering a 7.4% stake in Telefonica Brasil SA, a subsidiary of Telefonica. The deal is expected to close in the first half of 2015.
Telefonica currently has a Zacks Rank #4 (Sell).
Stocks to Consider
Better-ranked stocks in this sector include Chunghwa Telecom Co., Ltd. CHT, Vonage Holdings Corporation VG and China Unicom (Hong Kong) Limited CHU. All these stocks sport a Zacks Rank #1 (Strong Buy).
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