Telefonica (TEF): A Buy on GVT Buyout & Mexico Strength

On Dec 22, Zacks Investment Research upgraded Spanish telecom giant – Telefonica S.A. TEF – to a Zacks Rank #2 (Buy) from a Zacks Rank #4 (Sell).

Telefonica reported weak financial results in the third quarter of 2015 wherein earnings per ADS decreased year over year. Moreover, revenues fell considerably short of the Zacks Consensus Estimate.

However, the company is poised to benefit from the widespread adoption of broadband and data services, pricing revision, network enhancement and strategic collaborations. Moreover, Telefonica's continued focus on organic growth and portfolio optimization should serve it well in the long term.

Telefonica has reportedly closed the acquisition of Vivendi's broadband assets – GVT. For Telefonica, synergies from the acquisition appear quite promising. The GVT deal is expected to place Telefonica in a better position within the broadband segment vis-a-vis a stronger rival like America Movil S.A.B. de C.V. AMX.

In addition, plans of introducing a voice-command web search engine, accelerated deployment of ultrafast networks, increased smartphone penetration, continued rollout of fiber and LTE should drive considerable growth for the company.

Also, Telefonica, which has a strong foothold in Latin America, announced in Sep 2015 that its Mexican unit is open to enter into a wireless network sharing agreement with rival operators. Notably, earlier this year, AT&T, Inc. T entered the Mexican telecom industry with the acquisition of Gurpo Iusacell and Nextel de Mexico. In addition, Mexican cable MSO (multi service operator) Grupo Televisa S.A. TV has also received a go-ahead from the Mexican telecom regulator, the Federal Telecommunications Institute IFT, to foray into the wireless space. However, Grupo Televisa is yet to take any decision in this regard.

Interestingly, Mexico is the largest economy in the Latin-American region. Also, the wireless penetration rate is relatively low in this country. Telefonica already boasts a strong presence in the Mexican wireless industry commanding nearly 20% market share. Thus, considering such positives, business agreements with formidable rivals like America Movil and AT&T may further bode well for Telefonica before the market reaches saturation.

Moreover, Telefonica recently announced its plans to launch video services in seven new Latin-American markets in 2016. If things go as planned, it will make Telefonica the largest pay-TV operator in the Spanish and Portuguese TV content space.

Meanwhile, for 2015, the company reiterated its expectations of total revenue growth at 9.5% year over year (earlier 7%). Moreover, for the first time since 2008, Spain returned to positive revenue growth in the third quarter, exhibiting gradual recovery.

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