Telefonica SA (TEF, Financial) experienced a daily loss of 2.29%, and a 3-month gain of 2.27%. With an Earnings Per Share (EPS) of 0.28, the question arises: is the stock modestly overvalued? This valuation analysis aims to answer this question and provide a detailed insight into Telefonica SA's financial position, performance, and prospects.
Company Introduction
Telefonica SA operates mobile and fixed networks in various countries, including Spain, the U.K., Germany, Brazil, and other Latin American countries. The company derives more than 30% of its revenue from Spain, close to 20% from Germany, and 20% from Brazil. Over the years, Telefonica SA has been simplifying its corporate structure by selling noncore assets.
With a current stock price of $4.05 per share and a market cap of $23.30 billion, Telefonica SA's value can be compared to its GF Value, which is an estimation of fair value. This comparison will pave the way for a deeper exploration of the company's value.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
Telefonica SA (TEF, Financial) appears to be modestly overvalued according to the GuruFocus Value calculation. 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. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Given that Telefonica SA is modestly overvalued, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Telefonica SA has a cash-to-debt ratio of 0.98, which is better than 66.41% of 390 companies in the Telecommunication Services industry. The overall financial strength of Telefonica SA is 5 out of 10, which indicates that the financial strength of Telefonica SA is fair.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Telefonica SA has been profitable for 10 of the past 10 years. Over the past twelve months, the company had a revenue of $42.80 billion and Earnings Per Share (EPS) of $0.28. Its operating margin is 9.07%, which ranks worse than 50.9% of 391 companies in the Telecommunication Services industry. Overall, the profitability of Telefonica SA is ranked 6 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. 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 -6%, which ranks worse than 80.95% of 378 companies in the Telecommunication Services industry. The 3-year average EBITDA growth rate is -2.6%, which ranks worse than 72.84% of 335 companies in the Telecommunication Services industry.
ROIC vs WACC
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 2.99, while its WACC came in at 8.99.
Conclusion
In conclusion, the stock of Telefonica SA (TEF, Financial) gives every indication of being modestly overvalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 72.84% of 335 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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