Recommendation Buy 150 shares Telecommunication sector – Team 5
Description Spanish based company Integrated operator in telecom: Fixed-line & mobile phone Internet & data transmission services Pay TV 4 th position in Telecom sector worldwide (by market cap) 1 st as European integrated operator 245 million customers (June 2008) 60% business international
Market Size
Summary statistics TelefonicaAmerica Movil France Telecom S&P Global Tel Price week range – – Beta Market cap B62.23B49.55B185.8B P/E EPS N.A Dividend yield 5.7%1.4%10.7%5.99%
Price chart - Competitors
Price chart - Industry
Industry trends Main growth in broadband, mobile phones and pay per view Growth by acquisitions Heavily capital-intensive Infrastructure Market share Intense competition among few companies. Especially in Europe.
Investment positives Strong market positions Spain (Telefonica S.A.) Latin America (Brazil: Telesp & Vivo) Europe (UK: O2) Very attractive growth profile due to: Latin America Eastern Europe Diversified portfolio of assets Economies of scale and efficiencies Dividends & share buyback Part of DJSI
High Organic growth preserving margins
News Nov 4, 2008: TEF Successfully completes tender offer for Chilean Telecom. June 11, 2008: TEF to sell iPhone to 16 countries (Spain, UK, Ireland, Brazil, Argentina…) Telefonica signs global agreement with Facebook to incorporate direct access from its mobile portals TEF chosen by Microsoft to provide voice over IP services to Windows Live Messenger customers in Argentina, Brazil, Chile, Colombia, Peru, the United States, and Venezuela.
Revenues – 2 nd Quarter 2008 Reported revenues rose 1.2% compared to the first half of 2007
Organic Revenue Growth RegionOrganic Revenue Growth Contribution to Organic Growth Guidance 08 Telefonica Group 6.7%6% - 8% Latin America12.2%4.3%11% - 14% Europe6.2%1.6%4% - 7% Spain2.1%0.5%2% - 3.5% Period Jan-Jun 2008
Risks Increasing price competition in Europe and some countries in Latin America (Brazil) Acquisitions & high levels of debt Political risks Argentina Currency risk (ADR) New regulatory measures and policies
Valuation TelefonicaAmerica MovilFrance Telecom P/E PEG Price/Book Profit margin18.93%17.74%10.62% Debt/Equity Current Ratio
Valuation - DCF WACC: WACC = 8.69% Cost of Equity: Ke = 12.93% Cost of Debt: Kd = 4.86% Market Value of Equity: E/(D+E) = 55.32% Market Value of Debt: D/(D+E) = 44.68% Tax Rate = 29.00% Growth rate: 1.2% - 1% - 2% - 5%... Terminal growth rate: 3% Intrinsic value: € (current: € 14.03)
Valuation - DDM
Valuation – Other references
Conclusion Buy 125 shares Summary reason: Strong results and organic revenue growth Diversification and integrated management High growth potential (Latin America, China) Prioritizing shareholders returns (good dividend + share buyback) Undervalued
R&D Spent 4.5 billion euros in R+D
Revenue Growth
Ratios
Competitors EuropeLatAmUSAsiaAfrica TelefonicaYes --- Telmex + A. Movil -Yes -- France Telecom Yes- VodafoneYes Telecom ItaliaYesBrazil--- AT&T--Yes-- VerizonItaly-Yes-- Deutsche Tel.Yes---- BTYes -
Currency Risk Volatile market Interest rate cut from ECB (potentially strengthening euro vs. dollar) Euro expected to stay between $1.2 and $1.3
Earnings Estimates
Credit Ratings