Long-established in the Telecommunication Services industry, Telefonica SA (TEF, Financial) has enjoyed a stellar reputation. However, it has recently witnessed a decline of 4.19%, juxtaposed with a three-month change of 1.93%. Fresh insights from the GuruFocus Score Rating hint at potential headwinds. Notably, its diminished rankings in financial strength, growth, and valuation suggest that the company might not live up to its historical performance. Join us as we dive deep into these pivotal metrics to unravel the evolving narrative of Telefonica SA.
Understanding the GF Score
The GF Score is a stock performance ranking system developed by GuruFocus using five aspects of valuation, which has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. The stocks with a higher GF Score generally generate higher returns than those with a lower GF Score. Therefore, when picking stocks, investors should invest in companies with high GF Scores. The GF Score ranges from 0 to 100, with 100 as the highest rank.
- 1. Financial strength rank: 5/10
- 2. Profitability rank: 6/10
- 3. Growth rank: 3/10
- 4. GF Value rank: 3/10
- 5. Momentum rank: 7/10
Based on the above method, GuruFocus assigned Telefonica SA the GF Score of 69 out of 100, which signals poor future outperformance potential.
Telefonica SA: A Snapshot of Its Business
Telefonica SA, with a market cap of $23.03 billion, operates mobile and fixed networks in Spain, the U.K., Germany, Brazil, and other Latin American countries like Colombia, Mexico, Argentina, and Chile, among others. The company derives more than 30% of its revenue from Spain, close to 20% from Germany and 20% from Brazil. Its U.K. operations are held through a joint venture with Virgin Media. For several years Telefonica has been simplifying its corporate structure by selling noncore assets. The company's sales stand at $42.78 billion with an operating margin of 9.07%.
Financial Strength Breakdown
Telefonica SA's financial strength indicators present some concerning insights about the company's balance sheet health. Telefonica SA has an interest coverage ratio of 1.43, which positions it worse than 82.72% of 301 companies in the Telecommunication Services industry. This ratio highlights potential challenges the company might face when handling its interest expenses on outstanding debt. It's worth noting that the esteemed investor Benjamin Graham typically favored companies with an interest coverage ratio of at least five.
The company's Altman Z-Scoreis just 0.67, which is below the distress zone of 1.81. This suggests that the company may face financial distress over the next few years. Additionally, the company's low cash-to-debt ratio at 0.98 indicates a struggle in handling existing debt levels.
Growth Prospects
A lack of significant growth is another area where Telefonica SA seems to falter, as evidenced by the company's low Growth rank. The company's revenue has declined by -6 per year over the past three years, which underperforms worse than 80.26% of 380 companies in the Telecommunication Services industry. Stagnating revenues may pose concerns in a fast-evolving market.
Over the past five years, Telefonica SA has witnessed a decline in its earnings before interest, taxes, depreciation, and amortization (EBITDA). The three-year growth rate is recorded at -2.6, while the five-year growth rate is at -2.7. These figures underscore potential challenges in the company's profitability. Lastly, Telefonica SA predictability rank is just one star out of five, adding to investor uncertainty regarding revenue and earnings consistency.
Conclusion
Given Telefonica SA's financial strength, profitability, and growth metrics, the GuruFocus Score Rating highlights the firm's unparalleled position for potential underperformance. While the company has a rich history and a broad market presence, its current financial and growth indicators suggest that it may struggle to maintain its past performance. Investors should consider these factors when making investment decisions.
GuruFocus Premium members can find more companies with strong GF Scores using the following screener link: GF Score Screen
