Will Telefonica (TEF) Pull A Surprise This Earnings Season?

Spanish telecom behemoth Telefonica (MC:TEF) SA (NYSE:T) is scheduled to report first-quarter 2017 results on May 11, before the market opens.

The company delivered an average positive earnings surprise of 75.00% in the trailing four quarters.

Let’s see how things are shaping up for this announcement.

Factors Likely to Influence this Quarter

Over the past three months, shares of Telefonica have witnessed growth of 19.3% while the Zacks categorized Diversified Communication Services industry's increase of 7.8%.

We are impressed with Telefonica’s business strategies such as the launch of video services in several Latin-American markets, widespread adoption of broadband and data services, pricing revision, network enhancement and strategic collaborations, continued focus on organic growth and portfolio optimization. Telefonica is also capitalizing on opportunities in the digital world through several growth strategies. The acquisition of E-Plus also boosts Telefonica’s position as the largest mobile service provider in Germany in terms of subscriber count. We expect to see a similar uptrend in the to-be-reported quarter.

In spite of such ideas and their implementation, the company has a debt-heavy balance sheet. Accumulating debt and decreasing cash flows posed problems for its credit ratings. The fallout of the company’s IPO (initial public offering) plans was also 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, allocate its capital and reduce debt.

Further, the company continues to face tough competition in its domestic market. 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) .

Earnings Whispers

Our proven model does not conclusively show that Telefonica is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: Telefonica has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Telefonica has a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s 0.00% Earnings ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Key Pick

Here is a company from the Zacks categorized broader Utilities sector that houses Telefonica and has the right components to deliver an earnings beat this quarter.

Pattern Energy Group Inc. (NASDAQ:PEGI) , which will report first-quarter 2017 results on May 9,has an Earnings ESP of +250.00% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

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