Telefonica SA (TEF) has been hit this year by a weakened Euro/US dollar exchange rate and concern about the health of emerging markets, explains Roger Conrad, editor of Conrad's Utility Investor.

The company garners roughly half its revenue from South America, including Brazil. Nonetheless, Telefonica’s numbers and guidance are still following the improving trend of the past several years.

That’s reflected in EBITDA margin now at its highest level in four years (32.1 percent), rising free cash flow of $5.6 billion the last 12 months and net debt-to-EBITDA margin that’s dropped from 3.43 to 2.88 times since 2014.

Management efforts to slash debt dramatically with asset sales the past few years were thwarted by regulators and volatile market conditions. The company, however, has recently turned its biggest failure into success, as the UK O2 wireless brand rolls out across Europe.

Core to Telefonica’s long-term strategy is focusing on markets where it operates the best-in-class network, ensuring it competes for high margin customers on quality rather than low margin users on price.

That approach means higher capital spending the next few years, starting with 5-G spectrum auctions in Germany. Ability to outspend rivals in key markets, however, ensures growing market share long term.

Investors will closely watch revenue trends when the company announces second quarter results July 26. Of top interest are Chile and Spain, where wireless operations face tough competition and have only recently posted positive sales growth.

The other key focus will be debt. The company has cut its burden by 9 percent over the last 12 months. Yet some analysts reacted negatively to its successful $3.4 billion bid for La Liga soccer broadcast rights, preferring funds be used to cut further.

A successful initial public offering of the O2 unit and/or the growing Argentine business to cut debt is therefore the surest way to jolt Telefonica shares out of their slump. But at this point, the bar of expectations is set low enough at 10 times expected 2018 earnings for almost anything positive to do the trick.

That’s at the same time there are clear signs management’s long-term strategy is bearing fruit. And insiders are putting their money where their mouth is, increasing holdings by 47 percent over the last six months.

Those are good reasons to stick with deep value Telefonica, which could become a big second half winner even from a steadying of its home currency, the Euro. The stock is a buy up to 12 for aggressive investors.

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