Conrad Calls on Telefonica

04/14/2016 10:00 am EST

Focus: GLOBAL

Roger Conrad

Founder and Chief Editor, Capitalist Times

Roger Conrad is long-standing expert on utility and essential services stocks. In his Conrad’s Utility Investor, he reviews a favorite holding in his Aggressive Income Portfolio.

Telefonica (TEF) continues to deliver solid results, despite the heavy selloff that has battered its stock since August 2015.

This pressure coincides with the meltdown in Brazil, one of the telecom giant’s most important markets after Spain and Germany.

Telefonica owns a substantial interest in Telefonica Brasil (Sao Paulo: VIVT4), which operates the best-in-class network in Brazil and tends to attract higher-end customers.

Telefonica Brasil posted fourth-quarter sales and earnings that beat the Bloomberg consensus estimate, but Moody’s Investors Service still cut the company’s credit rating.

Telefonica Brasil continues to build and enhance its network in Brazil, which should pay off once the nation comes to grip with its economic challenges.

Excluding divestitures and acquisitions, Telefonica grew its revenue by 4 percent last year.

Operating income ticked up 3.6 percent year over year, fueled by a 30 percent increase in fiber-optic broadband connections and a tripling of 4G wireless users. Data traffic on the company’s network surged 40 percent in 2015.

The telecom giant grew its free cash flow to $0.71 per share and reduced its net debt in line with management’s guidance.

During Telefonica’s fourth-quarter earnings call, CEO César Alierta stated that he was “very, very confident” that the pending sale of UK-based O2 wireless to a unit of Hutchison Whampoa (Hong Kong: 13) would gain regulatory approval.

Closing this $15 billion deal would enable Telefonica to reduce its debt dramatically and free up cash to invest elsewhere in the business.

Brazil’s economic weakness and the uncertainty surrounding the O2 sale will continue to weigh on Telefonica’s stock in the near term, but the company continues to expand its dominant position in key markets.

Telefonica’s American depositary receipt looks like a solid value at any price less than $18.

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By Roger Conrad, Editor of Conrad’s Utility Investor

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