Is Telefonica Telegraphing Its Next Move?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my interest in the diversified telecommunication services sector where I've rated companies like 8x8 and Vonage to outperform the broad indexes -- and rated the likes of Telecom Argentina to underperform -- the CAPS supercomputer thought I also might be interested in another telecom, this time Spanish operator Telefonica (NYSE: TEF  ) . It was one of five Stocks of the Day it offered up for my consideration this week.

With Europe in turmoil and Spain facing growing levels of civil unrest, let's see what Telefonica has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Telefonica snapshot

Industry Diversified telecommunication services
Sector Telecommunication services
Market Cap $63.2 billion
Revenues, TTM $81.7 billion
1-Year Stock Return (16.8%)
Return on Investment 5.7%
Est. 5-Year EPS Growth 15.2%
Dividend & Yield N/A
Recent Price $13.84
CAPS Rating (out of 5) *****

Source: FinViz.com. N/A = not applicable; TEF does not pay a dividend. TTM = trailing 12 months.

Hanging up on growth
Yesterday's market rallied after Spain announced its budget for 2013, but quickly fizzled later in the day as the reality of the proposal's unworkability sunk in. Even with the country on the verge of fracturing, the ruling class has little fortitude to implement the necessary changes to ensure stability.

Even though Telefonica derives most of its revenue from Latin America (some 42% in 2011), Spain itself accounts for 27% making it the single largest contributing country. Yet, right up there is Brazil. Of the 25.8 million euros it generated in South America and Mexico last year, half of it comes from Brazil.

L'etat c'est moi!
Telefonica is also the leading provider of mobile, Internet, and data services south of the border, with a 30% share of the mobile market in Brazil and 23% of its Internet and data market. Of course, in some South American countries, although they represent a smaller percentage of revenues contributed, Telefonica essentially owns the market. In Peru, for example, it has a two-thirds share of mobile and a 93% share of Internet and data. It has a better than 40% share in both segments in Chile.

Even in Spain it is the dominant force to reckon with, having 40% of the mobile market there and almost 50% of the Internet and data business.

So even though Spanish banks such as Santander (NYSE: SAN  ) and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) have significant risks associated with the unraveling situation, Telefonica has exposure that investors need to watch.

Equally important are the competitive strains appearing in Latin America. Despite its dominant position, America Movil (NYSE: AMX  ) and NII Holdings (Nasdaq: NIHD  ) -- which represents Sprint's Nextel brand -- are seeking to make inroads. While Telefonica's market share has been relatively stable, its rivals are making gains. Its position slipped ever so slightly year to year in six of the 10 Latin American mobile markets it operates in, while it remained the same or slightly improved it two each. In Internet and data, it fell in all five countries.

It's good to be the king
The phone business remains a capital-intensive one, but operators are also under pressure to upgrade their systems. Telefonica and America Movil have largely rolled out their 3G networks, and NII is struggling to catch up. At less than eight times earnings, Telefonica appears inexpensive, and with its enterprise value trading for 13 times its free cash flow, while not a bargain-basement stock, it certainly offers investors a discount.

I'll be rating Telefonica to outperform the market indexes on CAPS as Latin America proves a rich resource to tap and it's been beaten harshly for Spain's travails. But tell me in the comments box below if you agree that it can shake the upheavals happening back home.

No buzz kill here
There's a different kind of telecom that is proving surprisingly effective. You can learn more about rural telecom giant Frontier Communications in the Fool's premium report that will help you gain a better understanding of the industry, so don't wait: Click here and read it today.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 29, 2012, at 7:57 AM, felixmk wrote:

    NII Holdings does not "represents Sprint's Nextel brand". It uses the Nextel brand but it has no other connection with Sprint.

  • Report this Comment On September 29, 2012, at 9:52 PM, TMFCop wrote:

    felixmk,

    Thanks for the comment, but really your critique is picking nits. Even NIHD's 10-K says thus:

    "...we have offered services under the Nextel brand under a trademark granted by Nextel Communications, Inc., a subsidiary of Sprint Nextel Corporation."

    I think it's close enough to what I wrote to be correct. I'd also note I didn't say it had anything else to do with Sprint.

    Cheers, and thanks for reading and commenting.

    Rich

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