The stock of Telefonica SA (NYSE:TEF, 30-year Financials) is believed to be modestly undervalued, 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 $4.73 per share and the market cap of $25.7 billion, Telefonica SA stock is believed to be modestly undervalued. GF Value for Telefonica SA is shown in the chart below.
Because Telefonica SA is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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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 1.19, which is better than 69% of the companies in Telecommunication Services industry. GuruFocus ranks the overall financial strength of Telefonica SA at 5 out of 10, which indicates that the financial strength of Telefonica SA is fair. 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 $49.5 billion and earnings of $0.405 a share. Its operating margin of 11.96% 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:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Telefonica SA is -8.2%, which ranks worse than 82% of the companies in Telecommunication Services industry. The 3-year average EBITDA growth is -8.3%, which ranks worse than 83% of the companies in Telecommunication Services industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Telefonica SA's return on invested capital is 4.37, and its cost of capital is 6.18. The historical ROIC vs WACC comparison of Telefonica SA is shown below:
To conclude, Telefonica SA (NYSE:TEF, 30-year Financials) stock gives every indication of being modestly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 83% 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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