On Oct 8, 2013 we maintained our Neutral recommendation on
Spanish telecom giant
). Over the long term, we expect the company to benefit from its
strategic measures in the European markets and continuous
expansion of LTE network in Latin American markets. However,
effects of reduction in mobile termination rates, increased
commercial expenses, heavy network investments and a highly
leveraged balance sheet could damage the company's prospect. The
company currently carries a Zacks Rank #2 (Buy).
We expect Telefonica to deliver strong revenues and profits
from increased commercial activity, faster adoption of
smartphones, expansion of mobile broadband services and
Telefonica Europe continues to gain market share from
increasing smartphone penetration and data growth. Affordable
tariffs along with contiguous launch of high speed data services
will aid the company to satisfy the data hungry customers.
Additionally, affordable tariffs along with contiguous launch of
high speed data services will aid the company to satisfy the data
hungry customers. Movistar's Fusion, which is an integrated
telecommunication product, continues to gain market traction and
remains one of the main growth drivers for the telecom
Latin America, in particular Brazil, remains one of the best
performing regions for Telefonica. The company expects to lead
the Brazilian market by expanding its LTE network and fixed
broadband services. In addition, it is also in the process of
launching a network virtualization test. Telefonica has taken
several growth initiatives to grab the opportunities in the
digital world. The company has formed several collaborations to
enhance its digital presence.
Spain remains a troubled market for Telefonica and despite its
gradual recovery the lingering effects of the Euro-zone crisis
continues to affect its performance. Implementation of MTR
(mobile termination rate) in Mexico will affect the company's
revenues in the Latin American country while LTE deployment and
enhancement of distribution channel will thwart its balance sheet
Despite continuous offloading of its non-core assets and debt
cuts, Telefonica has one of the highest debt levels within the
industry. A highly leveraged balance sheet weakens the company's
earnings growth prospect.
Among other stocks,
TIM Participacoes S.A.
Portugal Telecom SGPS S.A.
BT Group Plc.
) look attractive. TSU holds a Zacks Rank #1 (Strong Buy), while
PT and BT carry a Zacks Rank #2.
BT GRP PLC-ADR (BT): Free Stock Analysis
PORTUGAL TELCOM (PT): Free Stock Analysis
TELEFONICA S.A. (TEF): Free Stock Analysis
TIM PARTICP-ADR (TSU): Free Stock Analysis
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