Spanish telecom giant
(TEF) is expected to deliver strong profits throughout the year by
leveraging cost-cutting initiatives, restructuring efforts and the
benefits of Telefonica Global Resources. The company aims to
enhance overall revenue this year with continued focus on fixed and
mobile broadband growth as well as strong commercial activity.
Effective January 1, 2012, Telefonica has restructured its
operations into two regions -- Europe and Latin America -- and two
global business units -- Telefonica Digital and Telefonica Global
Resources. Operations in Spain will be included in Europe.
We believe that restructuring increases the prospects of
Telefonica and provides it with greater opportunity to outperform
in the global digital market, be more efficient as well as generate
economies of scale for growth and innovation in its international
Regionally, Latin America remains one of the best performing
regions for Telefonica, especially Brazil. Telefonica Europe
continues to gain market share from increasing smartphone
penetration and data growth.
Coming to Spain, the business is exposed to higher churn rates
(customer switch) and the ongoing reduction in mobile termination
rates (MTRs), which is the fee that operators charge each other to
connect calls. Further, the economic downturn in that country has
been more than expected and is likely to drag the company's profits
Due to weak Spanish operations, the company reported lackluster
earnings in the first quarter that were below the Zacks Consensus
Estimate and the year-ago quarter.
However, the company is making various efforts to turn around
its Spanish operations, which are expected to be profitable by the
next year. Telefonica would realize substantial savings from the
job cuts over a three-year (2011-2013) period. Further, the
strength is expected from competitive and higher quality service
offerings as well as reduced churn. Further, restructuring of the
financial sector and sustainable debt will bode well for the future
growth of the Spanish business.
Despite the layoff plan, assets sales and debt cuts,
Telefonica's earnings prospects remain gloomy due to its highly
leveraged balance sheet. The company currently operates with a high
debt level. Additionally, Telefonica is funding its acquisition
activities by raising debt, thereby resulting in higher interest
expense. Moreover, the ongoing initiatives to improve efficiency
and enhance mobile data across regions will increase commercial
expenditure, and result in earnings dilution.
Further, Telefonica remains challenged by a weak domestic
economy, the slowdown in Brazil, the ongoing reduction in mobile
termination rates, a highly leveraged balance sheet and growing
France Telecom S.A.
Vodafone Group Plc
China Mobile Ltd.
America Movil S.A.B. de C.V.
Hence, we are maintaining our long-term Neutral rating on
Telefonica. But for the short term (1-3 months), the stock retains
a Zacks #4 (Sell) Rank.
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