Telefonica (TEF): Capitalizing From the European Debt Crisis
As the Euro continues to get absolutely demolished (EUR/USD is currently at 1.23 which we haven’t seen since April 2006, ouch!) there has been a lot of talk around the Fool discussing how to best take advantage of this situation. Some have offered up the idea of betting on a Greek recovery/survival and picking up shares of NBG or OTE. I have to say that OTE does make a compelling buy especially as it continues to set new 52 week lows. (I may eventually pick up some shares if it dips much lower.)
However, what concerns me with these plays and many others that Fools have mentioned is that while they may not be solely focused on the PIIGS, they are basically completely tied Europe as a whole. Now I don’t think the EURO will go down in flames, but I do believe they are not out of the woods yet so to speak, and that this recent debt issue raises serious and legitimate concerns overall its long term viability in the current form. Basically, I’d rather not buy into too many companies that only get their revenue from European nations as there is still potential for significant problems going forward IMO.
So the questions becomes, how to best take advantage of the recent EURO meltdown without having too much exposure to what may ultimately turn out being a prolonged European downturn/slow recovery/what have you?
Simply put, I believe the answer may be Telefonica (TEF).
TEF is the third largest telecom in the world; only behind China Mobile and Vodafone with yearly revenue of ~80B (yes billion) in US dollars. My point is, it’s a behemoth of a company and not going anywhere anytime soon. Even if the ERUO blows up tomorrow, TEF will still be, period.
Revenue and profit has been essentially flat the last three years, even though there was a worldwide recession. This is a huge positive in my book as it shows they are not very susceptible to economic downturns.
(Revenue, profit) (All numbers are in US dollars unless otherwise stated)
2007: 78B, 12.3B
2008: 85B, 11.2B
2009: 79B, 10.9B
2010 revenue est.: 80-82B
2010 EPS est.: 2.1 EURO (using today’s exchange rate (1.23) that is 2.58)
To be clear, Telefonica is traded on the New York Stock Exchange under the ticker TEF which is an ADR and represents 3 shares of the Telefonica company. Thus, current EPS for 2010 are 6.3 EURO or 7.75 USD (using 1.23 again). This puts TEF at a forward 2010 P/E of 7.1. Cheap!!! For comparison, Verizon and AT&T have forward 2010 P/E of 12 and 11 respectively.
The best part of TEF is actually the killer dividend, which has been consistently raised every year the last 5 years. Get this; the current dividend is 9.27%. What?!? (Ha ha ha, I feel like I’m GS and getting free money from the FED!) TEF is a dividend machine and has no intention of letting up anytime soon. In their most recent quarterly report, they reconfirmed their commitment to dividends and reiterated their guidance of issuing at least 5.25 EURO (6.46 USD using 1.23) per ADR share in 2012. Wowzaaa!
As I mentioned, I am looking for companies that derive their revenue from across a broad spectrum, specifically non-European countries. TEF is just that as they are a telecomm powerhouse in Latin and South America. Revenue breakdown for TEF in Q1 2010 was as follows:
Europe (minus Spain): 26%
Latin/South America: 41%
While they are somewhat dependent on European countries, they are not solely reliant on them.
I am a big fan of South America going forward and actually believe this will greatly increase their revenue stream in the future. In fact, TEF still has a ton of room to grow IMO. Imagine that, a $80B yearly revenue company with actual growth prospects, yes! Q1 2010 growth rates (losses) were as follows:
Europe (minus Spain): 7.2%
Latin/South America: 5.4%
Well there you have it Fools, a solid, extremely profitable company with a killer dividend, on the cheap. What else could you want out of life? Telefonica is looking more and more appealing to me by the day and just might have to pick up some shares in the near future. I’m not promising a “home run” return with TEF, but there is definitely upside potential here and an extra large dividend while you wait things out. From a quick technical perspective, they look to have some decent support around ~50. Depending on how things shake out in the European debt debacle, I might look to pick up shares of TEF there.
So quit reading and get out there and buy buy buy!
Ps, I’d definitely like to hear people’s thoughts on this and see if/where my logic is flawed. So come on Fools, bring on the criticism/snide remarks/stupid comments/etc.!