Why We're Buying Telefonica

The video below is part of The Motley Fool's "11 O'Clock Stock" series, where we recommend a new stock every weekday at 11 a.m. ET on Fool.com over 50 weekdays. To see a video of co-founder Tom Gardner explaining the series, click here. To see our original recommendation of Telefonica (NYSE: TEF  ) , click here.

Investors have been fleeing European stocks as concerns have mounted over sovereign debt levels on the continent. Fool analyst Jordan DiPietro says there are legitimate concerns about that debt, however, a lot of stocks have been battered unfairly, and foreign telecoms happen to be an area that looks particularly attractive. DiPietro thinks Telefonica, which is a Spanish company, has some great prospects and is trading at a really reasonable price. To see DiPietro's full thoughts on Telefonica, watch the video, then read on below:

Right now, there's definitely plenty of beaten-down foreign telecom companies to choose from. Telefonica competes with Vodafone (NYSE: VOD  ) , France Telecom (NYSE: FTE  ) , America Movil (NYSE: AMX  ) , and a handful of other companies. DiPietro likes Telefonica because it has been lumped in with the Spanish economy, so investors are nervous about it right now. However, about 65% of its revenues come from outside of Spain, and it has a really dominant presence in Latin America. It recently reached an agreement with Portugal Telecom to acquire its 50% stake in Vivo, which is Brazil's largest mobile operator. This makes Telefonica the No. 1 provider in a country that has more than 150 million cell-phone users.

Looking at its forward P/E multiple of 8.9, Telefonica is trading well below its five-year historical average. In addition, shares are around $70, and DiPietro assesses its fair value at about $84, which means there's at least a 20% margin of safety. Add to that a solid 5.8% dividend yield, and you've got a really stable company that's significantly undervalued.

Jordan DiPietro owns shares of Telefonica. He'd love to buy more, but spent most of his discretionary cash buying a case of rare Avril Lavigne pogs last week. America Movil is a Motley Fool Global Gains recommendation. France Telecom is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (12)

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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 August 09, 2010, at 5:40 PM, energysystems wrote:

    I'll stick with VOD. Higher dividend, lower P/E, larger market cap, roughly one third the price of TEF, and no pesky dividend withholding tax.

  • Report this Comment On August 09, 2010, at 7:58 PM, mustang28027 wrote:

    Why not own both, or go into a telecom ETF?

  • Report this Comment On August 10, 2010, at 7:47 PM, Indymonkey wrote:

    I went with FTE - lower priced (for us on a budget) at around $21-22, assessed value around $34. It will take awhile, I am sure. Dividend at about 8% and forward PE at about 10.5. Although it has a shrinking fixed line business (that is still very profitable) it controls about 40% of the wireless market in France and large shares in Poland, Spain, and other growing markets.

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