Here's Why You Should Add Telefonica (TEF) To Your Portfolio

On Jul 10, Spanish telecom giant, Telefonica (MC:TEF) S.A. (NYSE:T) was upgraded by a notch to a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We believe that the upgrade 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, price revision, network enhancement, strategic collaborations and focus on organic growth and portfolio optimization.

We further believe that such strategic moves might have helped the company witness impressive financial results in the last reported first-quarter 2017. 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. Total revenue came in at €13,132 million (roughly $13,993 million), up 5% year over year.

The company continues to capitalize on opportunities prevalent in the digital market 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 debt. 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 reducing debt.

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

Other Initiatives

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

Telefonica and Huawei are also forging ahead to bolster their foothold in the Internet of Things (IoT) suite. The companies unveiled plans of launching an Open IoT Lab for the development of products and applications related to Narrowband IoT (NB-IoT) technology.

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

In the last three months, share price of Telefonica has declined 6.43%, while the Zacks categorized Diversified Communication Services industry has gained over 0.11%.

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