Will Telefonica (TEF) Disappoint This Earnings Season?

Spanish telecom behemoth Telefonica SATEF , is scheduled to report fourth-quarter 2016 results on Feb 23, before market open.

Over the past three months, shares of Telefonica witnessed growth of 16.94% while the Zacks categorized Diversified Communication Services industry gained 5.18%.

Last quarter, the company posted a positive earnings surprise of 75.00%. Moreover, the company's earnings outshined the Zacks Consensus Estimate in two of the previous four quarters, with an average beat of 106.25%.

Let's see how things are shaping up for this announcement.

Factors Likely to Influence this Quarter

We are impressed with Telefonica's business strategiessuch as the launch of video services in several Latin-American markets, widespread adoption of broadband and data services, pricing revision, network enhancement and strategic collaborations, continued focus on organic growth and portfolio optimization. Telefonica is also capitalizing on the opportunities in the digital world through several growth strategies. The acquisition of E-Plus also bodes well as it is expected to place Telefonica as the largest mobile service provider in Germany in terms of subscriber count.

In spite of such ideas and their implementation, the company has a debt laden balance sheet. Accumulating debt and decreasing cash flows posed problems for its credit ratings. In Nov 2016, Telefonica was downgraded by international credit rating agency, Moody's Investors Service following its debt-reduction advice to the company by the end of 2016. Moody's downgraded the guaranteed subsidiaries of Telefonica from Baa2 to Baa3, and preferred stock ratings from Ba1 to Ba2 and short-term ratings to Prime-3 from Prime-2.

Telefonica's last financial statements clearly implied that the company shall fail to meet the deleveraging targets by Dec 2017, which justifies the rating downgrades. The fallout of the company's IPO (initial public offering) plans was also a major setback as these were attempted to generate cash and reduce its debt burden.

Further, the company continues to face tough competition in its domestic market. Also, in the Latin American markets, Telefonica competes with large global telecom operators like AT&T Inc. T and America Movil SAB AMX .

Earnings Whispers

Our proven model does not conclusively show that Telefonica is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: Telefonica has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 18 cents. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Telefonica has a Zacks Rank #2 which increases the predictive power of ESP. However, the company's 0.00% ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Telefonica SA Price and EPS Surprise

Telefonica SA Price and EPS Surprise | Telefonica SA Quote

Stock to Consider

Here is a company in the Zacks-categorized broader 'Utilities' sector that has the right combination of elements to post an earnings beat this quarter.

Pinnacle West Capital Corporation PNW is expected to release fourth-quarter 2016 results around Feb 24, 2017. The company has an Earnings ESP of +2.04% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

However, the company's earnings lagged the Zacks Consensus Estimate in three of the previous four quarters, with an average miss of 9.99%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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