Telefonica Cut To Underperform At This Major Wall Street Firm

• Telefonica S.A. (ADR) TEF shares have lost 15 percent since July 20, even after trading above $15 till August 14.
• Credit Suisse’s Justin Funnell downgraded the rating on the company from Neutral to Underperform, while reducing the price target from €13 to €10.50.
• Funnell expects the company to report its 3Q15 results short of the consensus estimates.

Telefonica is scheduled to report its 3Q15 results on November 6. Analyst Justin Funnell said that the CS estimates were 10 percent below consensus, “reflecting both FX and underlying assumptions.”

Funnell projected further deceleration in Vivo growth, due to weak macro trends. He also expects the company’s performance to be impacted by rising costs and bad debts.

In the report Credit Suisse noted, “In Spain, the recovery in pricing is well established, offset to a degree with line loss and rising content costs. In Germany, consensus is now less bearish on margins than before whilst growth from mobile data is being offset by loss of e-plus customers to 1&1 and Drillisch.”

Telefonica’s shares are already down 20 percent from their recent highs, with pressure from the devaluation of the NR$ and GEM-related weakness. Although the stock now trades “on a sector FCF yield,” Funnell believes that a “modest discount” is warranted due to Telefonica’s exposure to Latam.

While the Hutchison acquisition of O2 is likely to close, Telefonica has alternatives if the deal does not go through. “We therefore currently consider Telefonica's credit rating not to be in question,” the analyst said.

The EPS estimates for 2016 and 2017 have been reduced from €0.64 to €0.60 and from €0.79 to €0.68, respectively.