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Telefonica Stock Rises 24% Year to Date: Redeem Gains or Stay Invested?
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Shares of Telefónica, S.A. (TEF - Free Report) have rallied 24.1% year to date, outperforming its sub-industry, the Zacks Utilities sector and the S&P 500 composite’s growth of 5.2%, 16.6% and 20%, respectively.
TEF stock’s good run on the trading front can be attributed to its improving financial performance. The company beat on earnings in each of the trailing four quarters. Based in Madrid, Spain, Telefonica provides mobile and fixed communication services in Europe and Latin America. In recent years, Telefonica has invested heavily in the deployment and transformation of its network to provide excellent connectivity in terms of capacity, speed, coverage and security.
Image Source: Zacks Investment Research
TEF closed the last trading session at $4.83, close to its 52-week high of $4.93. The stock also trades above its 100-day and 200-day moving averages.
Image Source: Zacks Investment Research
Investors are now most likely contemplating whether to stay invested or cash out. Let’s dive into TEF’s prospects and determine the best course of action for your portfolio.
TEF’s Network Expansion Efforts to Drive Growth
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 has enhanced its 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 in the first half of the year. The strategic nonbinding MOU signed with Vodafone in Spain for the creation of a FibreCo highlights its hands-on approach to market optimization and network rationalization. The company also signed a 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. that extends beyond 2030.
TEF Remains Focused on Profitability
In the second quarter, EBITDAaL minus CapEx surged 11.5% year over year, positioning Telefonica well above its full-year guidance. This growth was supported by a disciplined capital expenditure approach, with a CapEx-to-sales ratio of 12.1%, underscoring efficient operational management.
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.
Driven by progress in the first half, management remains confident about achieving its financial outlook for 2024. TEF continues to expect revenues to grow approximately 1%. EBITDA is expected to rise 1-2%. The CapEx-to-sales ratio is likely to be up 13%.
TEF PE Multiple Trades at a Discount
TEF presents a compelling investment opportunity with its attractive forward 12-month price-to-earnings ratio of 14.05X, lower than the industry average of 17.16X observed in the past year. Its forward 12-month price-to-earnings ratio positions Telefonica as a value-driven choice with significant upside potential.
Image Source: Zacks Investment Research
Huge Debt, FX Volatility & Competition: Big Concerns for TEF
Telefonica has a debt-heavy balance sheet. As of June 30, 2024, the company had €5,268 million in cash and cash equivalents against €33,813 million of non-current financial liabilities. Although the company is working to bring down its debt through modified financial strategies, accumulating debt may pose a problem for TEF.
Apart from a huge debt load, increasing competition in telecom services across Europe and Latin America can negatively impact margin performance. Maintaining competitive pricing amid rising operational costs and regulatory demands poses a challenge to sustaining profitability.
Also, fluctuations in FX rates can impact growth projections, affecting overall financial performance. The macroeconomic uncertainty has contributed to the depreciation of the currencies of Latin America versus the euro. Telefonica classified its operations across Latin America (excluding Brazil) as non-core, given the challenging market conditions across these markets and the declining contribution to revenues and profitability in recent years.
End Note
A nuanced approach is needed while dealing with TEF stock. Discounted valuation and strategic investments in network expansion and operational efficiency bode well. However, competitive pressures and forex volatility amid dynamic market conditions remain concerns. TEF appears to be treading in the middle of the road and investors could be better off if they trade with caution.
TEF carries a Zacks Rank #3 (Hold) at present.
Stocks to Consider
Some better-ranked stocks worth consideration in the broader space are Seagate Technology Holdings plc (STX - Free Report) , NetApp (NTAP - Free Report) and American Software, Inc. . While Seagate and NetApp sport a Zacks Rank #1 (Strong Buy) each, AMSWA carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for STX’s fiscal 2025 EPS is pegged at $7.41, which remained unchanged in the past 30 days. STX’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters while missing in the remaining quarter, the average surprise being 80.9%. The stock has surged 64.4% in the past year.
The Zacks Consensus Estimate for NTAP’s fiscal 2025 earnings is pegged at $7.08, unchanged in the past seven days. NTAP’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 8.6%. Its shares have gained 62% in the past year.
The Zacks Consensus Estimate for American Software’s fiscal 2025 EPS is pegged at 38 cents, unchanged in the past seven days. AMSWA’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters while matching in the remaining quarter, the average surprise being 84.5%. Its shares have lost 2.2% in the past year.
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Telefonica Stock Rises 24% Year to Date: Redeem Gains or Stay Invested?
Shares of Telefónica, S.A. (TEF - Free Report) have rallied 24.1% year to date, outperforming its sub-industry, the Zacks Utilities sector and the S&P 500 composite’s growth of 5.2%, 16.6% and 20%, respectively.
TEF stock’s good run on the trading front can be attributed to its improving financial performance. The company beat on earnings in each of the trailing four quarters. Based in Madrid, Spain, Telefonica provides mobile and fixed communication services in Europe and Latin America. In recent years, Telefonica has invested heavily in the deployment and transformation of its network to provide excellent connectivity in terms of capacity, speed, coverage and security.
Image Source: Zacks Investment Research
TEF closed the last trading session at $4.83, close to its 52-week high of $4.93. The stock also trades above its 100-day and 200-day moving averages.
Image Source: Zacks Investment Research
Investors are now most likely contemplating whether to stay invested or cash out. Let’s dive into TEF’s prospects and determine the best course of action for your portfolio.
TEF’s Network Expansion Efforts to Drive Growth
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 has enhanced its 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 in the first half of the year. The strategic nonbinding MOU signed with Vodafone in Spain for the creation of a FibreCo highlights its hands-on approach to market optimization and network rationalization. The company also signed a 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. that extends beyond 2030.
TEF Remains Focused on Profitability
In the second quarter, EBITDAaL minus CapEx surged 11.5% year over year, positioning Telefonica well above its full-year guidance. This growth was supported by a disciplined capital expenditure approach, with a CapEx-to-sales ratio of 12.1%, underscoring efficient operational management.
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.
Driven by progress in the first half, management remains confident about achieving its financial outlook for 2024. TEF continues to expect revenues to grow approximately 1%. EBITDA is expected to rise 1-2%. The CapEx-to-sales ratio is likely to be up 13%.
TEF PE Multiple Trades at a Discount
TEF presents a compelling investment opportunity with its attractive forward 12-month price-to-earnings ratio of 14.05X, lower than the industry average of 17.16X observed in the past year. Its forward 12-month price-to-earnings ratio positions Telefonica as a value-driven choice with significant upside potential.
Image Source: Zacks Investment Research
Huge Debt, FX Volatility & Competition: Big Concerns for TEF
Telefonica has a debt-heavy balance sheet. As of June 30, 2024, the company had €5,268 million in cash and cash equivalents against €33,813 million of non-current financial liabilities. Although the company is working to bring down its debt through modified financial strategies, accumulating debt may pose a problem for TEF.
Apart from a huge debt load, increasing competition in telecom services across Europe and Latin America can negatively impact margin performance. Maintaining competitive pricing amid rising operational costs and regulatory demands poses a challenge to sustaining profitability.
Also, fluctuations in FX rates can impact growth projections, affecting overall financial performance. The macroeconomic uncertainty has contributed to the depreciation of the currencies of Latin America versus the euro. Telefonica classified its operations across Latin America (excluding Brazil) as non-core, given the challenging market conditions across these markets and the declining contribution to revenues and profitability in recent years.
End Note
A nuanced approach is needed while dealing with TEF stock. Discounted valuation and strategic investments in network expansion and operational efficiency bode well. However, competitive pressures and forex volatility amid dynamic market conditions remain concerns. TEF appears to be treading in the middle of the road and investors could be better off if they trade with caution.
TEF carries a Zacks Rank #3 (Hold) at present.
Stocks to Consider
Some better-ranked stocks worth consideration in the broader space are Seagate Technology Holdings plc (STX - Free Report) , NetApp (NTAP - Free Report) and American Software, Inc. . While Seagate and NetApp sport a Zacks Rank #1 (Strong Buy) each, AMSWA carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for STX’s fiscal 2025 EPS is pegged at $7.41, which remained unchanged in the past 30 days. STX’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters while missing in the remaining quarter, the average surprise being 80.9%. The stock has surged 64.4% in the past year.
The Zacks Consensus Estimate for NTAP’s fiscal 2025 earnings is pegged at $7.08, unchanged in the past seven days. NTAP’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 8.6%. Its shares have gained 62% in the past year.
The Zacks Consensus Estimate for American Software’s fiscal 2025 EPS is pegged at 38 cents, unchanged in the past seven days. AMSWA’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters while matching in the remaining quarter, the average surprise being 84.5%. Its shares have lost 2.2% in the past year.