"Fame on the wireless as far as it goes
Is all very well but every girl knows
She needs a man she can monopolize
With fingers in dozens of different pies."
--From "Evita"
Eva Peron's strategy to keep trading up boyfriends until she landed the most powerful man in Argentina reminded me of my June decision to invest in Telefonica
The May wipeout in small caps and emerging-market funds jolted me out of a long-term reverie, during which I had essentially ignored much of the large-cap world. But I still loved telecommunications as an international investment theme, and I still wanted significant exposure to Latin America and its long-term economic rebound -- I just didn't want all the volatility. Telefonica fit the bill.
From its base as Spain's dominant provider of fixed-line services, wireless, and broadband communications, Telefonica has become the world's sixth-largest telecommunications company. The company now has a significant presence in 15 countries and partnership operations in 40 altogether, with more than 100 million customers. It's a leader in Latin America, with operations in eight of the largest markets.
For income lovers in the Foolish world, Telefonica also pays a 3%+ dividend, which management is committed to maintaining.
Citigroup published a Nov. 29 report with a $69 target for Telefonica's U.S. ADR shares. Citigroup likes Telefonica's domestic margins and cash flow, not to mention the growth in Latin America. It expects the strong performance to continue, though margin pressure and competition are always a factor to watch closely. European operations are also growing with the recent O2 acquisition in the U.K. and operations in hot eastern European markets like the Czech Republic.
A look through Telefonica's valuation ratios convinced me to keep my shares despite the nice run-up from the high 40's to the mid-60's since I first invested. Telefonica's P/E ratio in the mid-teens is far below the industry average 24; same with price-sales at 1.57 vs. the 2.6 norm. Price-cash flow runs 5-6 -- again, far below most competitors.
Telefonica grew revenues at a steamy 43% rate in the third quarter, with earnings up a whopping 64%. Not many U.S. large caps can put up numbers like that nowadays. The company also leaves rivals Vodafone
But Telefonica's debt load is a concern, at more than three times equity. However, while interest expense currently runs 4%-5% of gross revenues, net margins remain healthy at 10% or better. The average interest rate paid on debt dropped from more than 6% to the mid-4% range last quarter, and management remains committed to deleveraging their balance sheet with future cash flow.
A search for Foolish perspectives on Telefonica turns up almost nothing since 2000. Even in the CAPS community, only a handful of stock-pickers know the company exists. That, despite Telefonica tripling off its 2003 lows and posting huge growth quarter after quarter.
I think Telefonica is a solid addition to any international investment portfolio, as long as it manages its growth, maintains its margins, and keeps building shareholder value.
For additional international stock ideas, check our new international newsletter, Global Gains. Click here for more details.
Fool contributor Dale Baker , a private client portfolio manager and former U.S. diplomat with extensive experience in Europe and Africa, owns shares in Telefonica for himself and his clients. He welcomes your questions or comments . Vodafone is a Motley Fool Inside Value pick, while France Telecom is a Motley Fool Income Investor selection. The Fool has adisclosure policy.
