Telefónica, S.A. TEF stock has risen 12% in the past six months, outperforming the sub-industry and S&P 500’s growth of 2.7% and 10.7%, respectively.
TEF’s stock has outperformed some of its peers in the industry in the past six months. While TELUS Corporation TU and BCE Inc BCE shares have dropped 7.4% and 5.1%, respectively, shares of Deutsche Telekom AG DTEGY have moved up 19.2%.
Zacks Investment Research
Image Source: Zacks Investment Research
Improving financial performance is behind the stock price surge. Telefonica reported a 1.2% year-on-year revenue increase in the second quarter of 2024. The top-line growth was driven by the robust performance in both B2B and B2C segments. TEF’s main markets, including Spain, Germany and Brazil, witnessed positive commercial momentum, underscoring the company’s effective market positioning and customer-centric strategies.
Zacks Investment Research
Image Source: Zacks Investment Research
Network Expansion, Partnerships Augur Well for TEF
Telefonica expanded its fiber-to-the-home footprint by an additional 2 million premises in the second quarter, reaching 66% of population coverage across core markets. TEF achieved more than 90% 5G coverage in Spain and Germany. This enhances service quality and customer satisfaction. These initiatives are crucial for sustaining long-term growth and competitive advantage.
Telefonica has made considerable strides in its strategic initiatives and regional operations during the first half of the year. The strategic nonbinding MOU signed with Vodafone in Spain for creation of a FibreCo highlights its hands-on approach to market optimization and network rationalization. It also signed an MOU with Medico in Colombia for a possible corporate transaction of its operations.
Telefonica reached an agreement with ANATEL / Ministry of Communication on fixed voice concession to authorization model migration. It signed a mobile network sharing agreement with Vodafone U.K., which extends beyond 2030.
Telefonica Remains Focused on Driving Profitability
Operational efficiencies from Spain's network restructuring and legacy network decommissioning significantly reduced operating expenses, contributing to higher EBITDA growth. Telefonica's focus on leaner operations and capital efficiency bolsters its financial performance and free cash flow generation.
In the second quarter, EBITDAaL minus CapEx surged by 11.5% year over year, positioning Telefonica well above its full-year guidance trajectory. This growth was supported by a disciplined capital expenditure approach, with a CapEx-to-sales ratio of 12.1%, highlighting efficient operational management.
Driven by progress in the first half, management remains confident about achieving its financial outlook for full-year 2024. TEF continues to expect revenues to grow approximately 1%. EBITDA is expected to rise 1% to 2%. The CapEx-to-sales ratio is likely to be up to 13%.
TEF Faces Competition and Forex Volatility Concerns
Intense competition in telecom services across Europe and Latin America could lead to margin compression. Maintaining competitive pricing amid rising operational costs and regulatory demands poses a challenge to sustaining profitability.
The impact of weaker foreign exchange rates remains a concern. Fluctuations in FX rates could potentially mitigate future growth projections, affecting overall financial performance.
The macroeconomic uncertainty has contributed to the depreciation of Latin American currencies versus the euro. Telefonica classified its operations across Latin America (excluding Brazil) as non-core, given the challenging market conditions across these markets and their declining contribution to revenues and profitability in recent years.
Telefonica’s Debt-Laden Balance Sheet
Telefonica has a debt-laden balance sheet. As of June 30, 2024, the company had €5,268 million in cash and cash equivalents compared with €7,337 million at the end of the previous quarter. As of June 30, 2024, TEF had €33,813 million of non-current financial liabilities compared with €33,978 million at the end of the previous quarter. Although the company is striving to bring down its debt through modified financial strategies, accumulating debt may pose a problem for its credit ratings.
TEF’s Estimate Revision Activity
For Telefonica, the Zacks Consensus Estimate for earnings per share has remained unchanged for the current quarter, while it has increased by 2 cents for the next quarter in the past 60 days. The current quarter estimate stands at 8 cents, while the next quarter’s estimate is pegged at 9 cents.
Zacks Investment Research
Image Source: Zacks Investment Research
Telefonica: A Value-Driven Choice
TEF presents a compelling investment opportunity with its attractive forward 12-month price-to- earnings ratio of 13.31, lower than the industry average of 16.69 observed over the past five years.
Its forward 12-month price-to-earnings ratio positions Telefonica as a value-driven choice with significant upside potential. TEF is currently trading at a nearly 4.8% discount to its 52-week high of $4.80, reached on June 4, 2024.
Zacks Investment Research
Image Source: Zacks Investment Research
To Conclude
Telefonica is well-positioned to capitalize on market opportunities driven by its strategic investments in network expansion and operational efficiency. However, competitive pressures, forex volatility amid dynamic market conditions remain concerns for this Zacks Rank #3 (Hold) company.
Consequently, it might not be a prudent investment decision to bet on the TEF stock at the moment. However, investors already owning the stock could stay put.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report