On Sep 6, Spanish telecom giant, Telefonica S.A. (TEF - Free Report) was upgraded by a notch to a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Big Beat in Second-Quarter 2017
Telefonica’s performance in certain important metrics looks impressive in the last reported second-quarter 2017 results. Quarterly net income was €821 million (approximately $902 million), up 18.4% year over year. Moreover, second-quarter earnings per ADR (American Depository Receipt) came in at 16 cents, up 6.7% year over year. Total revenue amounted to at €12,960 million (roughly $14,241 million), up 1.9% year over year.
We believe that the impressive financial results came on the back of Telefonica’s business strategies which included the launch of video services in several Latin-American markets, widespread adoption of broadband and data services, price revision, network enhancement, strategic collaborations and focus on organic growth and portfolio optimization.
The company continues to capitalize on opportunities prevalent in the digital market through several expansion strategies. The acquisition of E-Plus boosts Telefonica’s position as the largest mobile service provider in Germany in terms of subscriber count. In Brazil, Telefonica operates through its subsidiary Telefonica Brasil SA (VIV - Free Report) .
Moreover, the company’s focus on increasing the weight of higher-value services so as to improve the quality of the Telefonica Group's customer base have resulted positively. This is evident from the increase in the average revenue per customer and churn reduction.
For fiscal 2017, Telefonica has upgraded its guidance and reiterated the dividend announced for the year. The company expects revenues to grow more than 1.5% year over year. OIBDA margin will expand 0.01% and capital expenditure will be around 16% of the total revenue.
On a year-to-date basis, shares of Telefonica have increased 14.5% compared with the industry’s gain of 8.4%.
When compared with the market at large, the stock’s performance looks favorable, as the S&P 500 index has gained 9.9% over the same time span.
Favorable Zacks Rank and Style Score
Growth investors look for stocks with aggressive earnings or revenue growth potential, which propel share price. Our research shows that stocks with a Growth Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best opportunities in the growth investing space.
Notably, the stock has an attractive VGM Score of A, along with its bullish Zacks Rank #2. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.
Valuation Indicates Some Upside
In terms of price-to-earnings ratio (P/E - F12M), which is often used to value telecom sector stocks, Telefonica’s valuation looks attractive. The stock currently has a trailing 12-month P/E ratio of 11.4 compared with 14.3 for the industry, it belongs to.
Even when compared with the market at large, the stock looks favorable, as the P/E ratio for the S&P 500 is at 18.3.
Sales and EPS Estimates
Additionally, for 2017, sales growth is pegged at 3.7% while Earnings Per Share (EPS) is likely to grow 3.6%
Positive Earnings Surprise History
Telefonica delivered a four-quarter average earnings surprise of 75.00%.
A Broker Favorite
We note that earnings estimates for Telefonica have moved up in the past 60 days, reflecting optimistic outlook of analysts. The earnings estimate for full-year 2017 and 2018 has increased during the said time frame.
The Zacks Consensus Estimate of earnings for fiscal 2017 has jumped 4.9% to 86 cents per share. The estimate for 2018 has soared 4.3% to 96 cents.
Given the wealth of information at the disposal of brokers, it is in the best interest of investors to be guided by broker advice and the direction of their estimate revisions. The direction of estimate revisions serves as an important pointer when it comes to the price of a stock.
Other Key Picks
Other top-ranked stocks in the broader Utilities sector are TELUS Corporation (TU - Free Report) and Telephone and Data Systems Inc. (TDS - Free Report) . While TELUS sports a Zacks Rank #1, Telephone and Data Systems carries a Zacks Rank #2.
For 2017, EPS of TELUS and Telephone and Data Systems are projected to grow 7.7% and 8.8%, respectively.
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