Telefonica SA (TEF, Financial)'s stock has experienced a daily loss of -3.83%, with a 3-month gain of 2.31%. The company's Earnings Per Share (EPS) stands at 0.28. But the question that begs an answer is: Is the stock modestly overvalued? In this article, we conduct a valuation analysis to answer this question. Read on to understand Telefonica SA (TEF)'s financial performance and its intrinsic value.
Company Introduction
Telefonica SA operates mobile and fixed networks in Spain, the U.K., Germany, Brazil, and other Latin American countries. Generating over 30% of its revenue from Spain, close to 20% from Germany, and 20% from Brazil, the company has been simplifying its corporate structure by selling noncore assets. The current stock price stands at $4.02, while the GF Value, an estimation of the fair value, is at $3.62. This hints at the stock being modestly overvalued.
Understanding GF Value
The GF Value is a unique measure of the intrinsic value of a stock. The GF Value Line on our summary page provides an overview of the fair value that the stock should be traded at. This value is calculated based on historical multiples, GuruFocus adjustment factor, and future estimates of the business performance. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Telefonica SA (TEF, Financial) appears to be modestly overvalued according to GuruFocus' valuation method. This implies that the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
Before investing, it's essential to check the financial strength of a company. A look at the cash-to-debt ratio and interest coverage can provide insights into the company's financial health. Telefonica SA has a cash-to-debt ratio of 0.98, which is better than 66.16% of 393 companies in the Telecommunication Services industry. This indicates that Telefonica SA's financial strength is fair.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. Telefonica SA has been profitable 10 over the past 10 years. However, its operating margin of 9.07% ranks worse than 50.65% of 387 companies in the Telecommunication Services industry. This indicates fair profitability.
Growth is a critical factor in the valuation of a company. Telefonica SA's 3-year average revenue growth rate is worse than 80.26% of 380 companies in the Telecommunication Services industry. This ranks worse than 72.46% of 334 companies in the Telecommunication Services industry, indicating poor growth.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. 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, while its WACC came in at 8.97.
Conclusion
In summary, Telefonica SA (TEF, Financial) appears to be modestly overvalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 72.46% of 334 companies in the Telecommunication Services industry. To learn more about Telefonica SA stock, you can check out its 30-Year Financials here.
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