The stock of Telefonica SA (NYSE:TEF, 30-year Financials) is believed to be possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $4.5 per share and the market cap of $24.5 billion, Telefonica SA stock appears to be possible value trap. GF Value for Telefonica SA is shown in the chart below.
The reason we think that Telefonica SA stock might be a value trap is because Telefonica SA has an Altman Z-score of 0.75, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Telefonica SA has a cash-to-debt ratio of 0.16, which is worse than 70% of the companies in Telecommunication Services industry. GuruFocus ranks the overall financial strength of Telefonica SA at 3 out of 10, which indicates that the financial strength of Telefonica SA is poor. This is the debt and cash of Telefonica SA over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Telefonica SA has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $49.8 billion and earnings of $0.293 a share. Its operating margin of 10.99% in the middle range of the companies in Telecommunication Services industry. Overall, GuruFocus ranks Telefonica SA's profitability as fair. This is the revenue and net income of Telefonica SA over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Telefonica SA is -8.2%, which ranks worse than 82% of the companies in Telecommunication Services industry. The 3-year average EBITDA growth rate is -8.3%, which ranks worse than 82% of the companies in Telecommunication Services industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Telefonica SA's ROIC was 3.73, while its WACC came in at 6.13. The historical ROIC vs WACC comparison of Telefonica SA is shown below:
To conclude, the stock of Telefonica SA (NYSE:TEF, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 82% of the companies in Telecommunication Services industry. To learn more about Telefonica SA stock, you can check out its 30-year Financials here.
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