Telesp Slips to Neutral

We are downgrading our recommendation on Brazilian fixed-line carrier Telecomunicacoes de Sao Paulo SA (TSP), better known as Telesp, to Neutral from Outperform. Currently, the stock retains the Zacks #3 Rank (Hold).

Telesp, the Brazilian subsidiary of Spanish telecom giant Telefonica (TEF - Analyst Report), is experiencing encouraging growth in its relatively new broadband Internet and Pay-TV businesses. Telesp’s “Speedy” broadband service (offering top speeds of 30 Mbps) continues to lead the domestic market.

The company plans to invest in technology upgrade and expansion of broadband network infrastructure to remain competitive in a rapidly changing market. Telesp is expanding its broadband network infrastructure in Brazil where the demand for Internet connections is growing rapidly.

Fourth quarter earnings outpaced the Zacks Consensus Estimate by 6 cents. Net income climbed 9.2% year over year on higher revenues. Higher broadband and data transmission revenue were partially offset by the erosion in legacy telephony business led to the 0.5% year-over-year increase in total revenue.

Telesp registered 680,000 net additions to its broadband service (offered under the “Speedy”, “Ajato” and “Fiberbrands"), in the last reported quarter, bringing the total subscriber base to roughly 3.3 million. Telesp is also strengthening its balance sheet by reducing its debt level. Total debt reduced substantially to R$1.83 billion from R$3.52 billion in 2009.

Although the company has been investing in new business opportunities such as video, broadband Internet and Pay TV to boost long-term growth prospects, we believe Telesp remains significantly challenged by the falling subscriber base of its legacy voice telephonic operation.

Moreover, the carrier’s exposure to an increasingly competitive environment is expected to limit operating results. The company operates in a highly regulated industry and is subject to changes in regulatory measures (including tariff revisions for local and long-distance business).

Read the full analyst report on TEF

Read the full analyst report on TSP