Telefonica (TEF) Well Poised On Solid Q1, Debts Prevail

On May 25, 2017, we issued a full earnings update research report on Spanish telecom giant, Telefonica (MC:TEF) S.A. (NYSE:T) . The company reported strong financial results in the first quarter of 2017, wherein both the top line and bottom line grew year over year.

Quarterly net income was €779 million (approximately $830 million) compared with a net income of €548 million (approximately $857 million) from the year-ago period. First-quarter earnings per ADR (American Depositary Receipt) came in at 19 cents, up a whopping 216.7% year over year.

Telefonica recorded total revenue of €13,132 million (roughly $13,993 million) in the reported quarter, up 5% year over year.

We believe that the impressive financial results came on the back of Telefonica’s business strategies which included the launch of video services in several Latin-American markets, widespread adoption of broadband and data services, pricing revision, network enhancement, strategic collaborations and continued focus on organic growth and portfolio optimization.

The company continues to capitalize on opportunities in the digital world through several expansion strategies. The acquisition of E-Plus boosts Telefonica’s position as the largest mobile service provider in Germany in terms of subscriber count.

In spite of such ideas and their implementation, the company has a debt-heavy balance sheet. Telefonica ended the first quarter of 2017 with cash and cash equivalents of €7,391 million (around $7,875.8 million) compared with €3,736 million (roughly $4,034.9 million) at 2016 end. The company exited the reported quarter with total debt of about €48,766 million (about $51,965 million) compared with €74,554 million ($80,518 million).

Accumulating debt and decreasing cash flows posed problems for its credit ratings. The fallout of the company’s IPO (initial public offering) plans was a major setback as these were attempted to generate cash and reduce its debt burden. To this end, the company has decided to sell 40% of its global telecommunications infrastructure unit Telxius Telecom to KKR Group to optimize its asset portfolio while allocating its capital and reduce debt.

Further, the company continues to face tough competition in its domestic market. In Brazil, Telefonica operates through its subsidiary Telefonica Brasil SA (NYSE:VIV) . Also, in the Latin American markets, Telefonica competes with large global telecom operators like AT&T Inc. (NYSE:T) and America Movil SAB (NYSE:AMX) .

Latest Updates

Telefonica is currently participating in different associations and is also inking deals. The company announced its involvemnet in the 5G Automotive Association (5GAA) wherein it will be joining a group of other leading telecommunications and automotive companies with the objective of accelerating the penetration of mobility services such as connected and autonomous car and intelligent road infrastructures.

Telefonica and Vodafone (LON:VOD) have also inked a commercial agreement, under which Vodafone can easily access Telefonica's fiber in all areas irrespective of the regulations.

Price Performance and Zacks Rank

Over the past three months, share price of Telefonica grew 11.44% while the Zacks categorized Diversified Communication Services industry gained over 5.75%.

Telefonica currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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