Reiterating Our Sell on Telmex

Telmex (TMX - Analyst Report) posted weak results for the first quarter of 2008. The short-term outlook seems uncertain due to the difficult economic environment in the U.S. and its effects on Mexico. The key Mexican market remains stagnant, even though growth in the Internet division is still positive. Hence, we are reiterating our Sell recommendation on the shares.

Price erosion is already a problem for Telmex, a situation that we do not expect to change any time soon. We anticipate potential earnings dilution in the near term as the company’s debt remains a substantial liability. The current valuation of TMX seems excessive if compared to other Latin American telecom operators. The company announced the division of Telmex and Telmex International (TII - Analyst Report).

TMX is trading at 10.1x our 2008 earnings estimate, which represents a significant discount to the forward P/E ratio for the S&P 500 and the industry average. Based on the division of Telmex into Telmex and Telmex International recently, we are reducing our target price from US$30.50 to US$21.75 per ADR, which is based on EV/2008 EBITDA of 4.5x.

Read the full analyst report on TMX

Read the full analyst report on TII