Telefonica TEF

Overview: TEF is a telecom company that engages in all sorts of access programs, including fixed/wireless telephone services, internet services, and bundled packages (TV and such). Headquartered in Spain they have three main segments existing in Europe, Latin American and Spain. Through investments they have a 9% stake in China Unicom, one of Chinas largest telecommunication providers. Their ARPU ranges from 6.2 Euro (Peru) to 25 Euro(Spain). Their largest growth segment arises from the Latin American business, which comprises over 42% of revenues and 50.6% of assets. Of those about 1/2 originated from their Brazilian business.

Stats: 7.5 P/E TTM, EV/EBITDA: 5.7, 3.0 P/B, 77% FCF payout ratio, 108.4B MC, 183.9 EV. 1.2 P/S. 85 billion in debt and 10.1B in cash MRQ. 11% FCF growth 5years. Piotroski of 6. DCF is 50% undervalued via standard 10yr 10%  4% terminal, 12% Discount rate. Historically valuations are at lows, despite stock run-up of over 25% over past year.

The Good: Excellent growth and continued gain in market share. Directors have substantial holdings in company. Very predictable and stayed profitable through recession and Euro zone crisis. Emerging market exposure but enters as a cost cutter with a reported good network. Future success and growth will be upgrading to smart phones and better plans. Currently majority of users in Latin America use prepaid plans. A significant advantage is their tie to low income persons in L.A. Besides serving a great social purpose this could infer loyalty as these people break poverty and desire for better phones.
Balance sheet also shows plenty of derivatives but all used for the purposes of hedging and all readily tradable. Very low amounts of level 3 investments only 27 million. Loans are financed predominantly with Euro (55%), USD 10%, Brazilian Real 8%. Loans also have an average maturity of 5.7 years.

The Bad: Huge amount of debt, expected interest payments of ~7billion over the next three years. Chairman was charged with insider trading in the past, although those charges were thrown out due to statue of limitations. Most profitable (per capita) markets are very mature and showing decline.

Major risks include: Masked organic growth due to highly merger friendly environment. Latin American countries have and probably will default. Venezuela showed to be a hyperinflationary environment recently(2010). Euro zone crisis seems contained but they still exposure to Ireland, Spain, Portugal. The biggest risk is interest rate hikes. Although probably contained a 100 bp rise in rates results in Euro 222 million decrease in consolidated income.
Dividend is subject to 15% withholding tax.

Summary: Again no position. I hesitate to jump in with such a heavily indebted company, despite the growth rates. TKC appears to be cheaper on a whole and with TEF being better understood another (several) look should be taken at TKC. Under 20/share there appears to be adequate MOS. I figure intrinsic value to be roughly 27-29/share based on my own FCF determinations.