Telefonica Strength Accounted For

We maintain our Hold rating for Telefonica S.A. (TEF - Analyst Report), the largest telecommunications company in Spain and Latin America. The company has been delivering strong quarterly results with improvements driven by strong performance in European and Latin American regions and healthy business momentum across wireless, broadband and Pay TV operating segments.

The company continues to generate strong free cash flow and offers a respectable dividend payout. However, the environment remains challenging with strong competition and we are exercising caution about the company's aggressive acquisition strategy, along with the integration process following such initiatives. Furthermore, there is the need to consider the currency exchange rate, which is associated with the Euro versus U.S.D as the dollar may be reaching its lower inflection point.

Telefonica is trading at 10.3x our 2008 earnings estimate, which is at a discount to the industry average as well as to the S&P 500 metric. Telefonica's dominant position in the Spanish telecom market (both fixed-line and wireless), and attractive growth prospects in Latin America are the baseline reasons for recent investor interest in this security. Our six-month price target of $90.00 per ADS is based on 11.0x our 2008 EPADS estimate.

Anindya Barman contributed to the report.

Read the full analyst report on TEF