The stock of Telefonica SA (NYSE:TEF, 30-year Financials) gives every indication of being 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 $4.53 per share and the market cap of $25.2 billion, Telefonica SA stock gives every indication of being 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 0.78, 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.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Telefonica SA has a cash-to-debt ratio of 1.19, which ranks better than 69% of the companies in Telecommunication Services industry. Based on this, GuruFocus ranks Telefonica SA’s financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Telefonica SA over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Telefonica SA has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $49.5 billion and earnings of $0.406 a share. Its operating margin is 11.96%, which ranks in the middle range of the companies in Telecommunication Services industry. Overall, the profitability of Telefonica SA is ranked 7 out of 10, which indicates fair profitability. 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year 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 rate is -8.3%, which ranks worse than 82% of the companies in Telecommunication Services industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Telefonica SA’s ROIC is 4.37 while its WACC came in at 6.20. The historical ROIC vs WACC comparison of Telefonica SA is shown below:
To conclude, the stock of Telefonica SA (NYSE:TEF, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is fair 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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