IS TELEFÓNICA ISSUING A POSSIBLE FAILURE?

A 3-years Financial & Stock Analysis for the Investor

Written by Marc Clotet.

Nov. 01, 2019

Telefónica Share Downward: Stock Breaks Down 20% (August 2019)

Telefónica is a worldwide telecommunications company, which aims at providing an innovative and attentive spirit regarding the state of the art technology. Telefónica was founded 1924 in Spain. Nowadays, Telefónica operates in 16 countries and employs an average of 120,138 professionals. In January-December 2018 the enterprise had consolidated revenues of 48,693 million euros. Telefónica is a listed company with more than 1,3 million shareholders, traded in several world’s stock markets, such as IBEX 35 and NYSE.

After presenting their last financial results concerning the second quarter of 2019 (Q2), between January and June, the share price showed a negative development in the Spanish stock exchange; the IBEX 35. According to experts, there are no reasons to justify such implausible and unexpected downward. It is estimated that the company has lost more than 20% value on IBEX35, despite its positive financial results. Why did Telefónica shares lost such a stock market value in less than a month? Was that a clear benediction to the individual investor, due to its appealing price? Or was it an unexpected warning for failure? Through this brief research paper the reader will be able to understand the fundamental finances from this Spanish company, in order to find out if the stock is suffering from a possible company’s bankruptcy or, on the contrary, if it is undervalued and has a strong growth potential for the long-term investor.

Latest Operations from the Company

With 16% of stock market listing loss during this 2019 fiscal year, Telefónica has been considered one of the most prejudiced companies in IBEX 35. Close to Telefónica we also found the regression of Ence and CIE Automotive, values which suffer from the effects of the worldwide commercial war. Spanish Banks such as Bankia, Bankinter and Banco Sabadell have also demonstrated an important fall, due to the British turbulences of a strong Brexit, which conducts to pound sterling volatility in FOREX and instability of the estimated 77 billions euros from Spanish companies investments throughout the United Kingdom. Nevertheless, it is being a good time for the Spanish renewable energetics, such as Iberdrola, which stands with a share price record since the world’s financial crisis in 2008. Naturgy and Enagás also show a perfect development with a rise of 12% and 2.5% respectively [1].


New Street Research maintains its expectations for Telefónica making recommendations for a fair purchase price between 9.6€ to 9.1€ per share. “We see the latest share weakness as an excellent time to buy stock” (New Street Research, August 30). New Street recognize the strong promotional activity which has faced the Spanish telecommunications companies, Telefónica and MásMóvil, during this summer. They stand by the lack of intensity from these activities compared to 2018. The Latin-American currency evolution impacts to the telecommunication’s company forecasts. The situation gets worse in Argentina, where the terms are much considerable than Brasil [2].


Many investors have taken advantage of this bumpy atmosphere which is facing Telefónica. Company managers have subsequently been acquiring stocks. According to the National Stock Market Commission (or Comisión Nacional del Mercado de Valores, CNMV, in Spanish), José María Álvarez-Pallete, chairman & CEO from Telefónica, purchased 100,000 shares at a current market-value of 5.98€. After his purchase, Álvarez Pallete increased the total amount of his shares above 1,45 million, which equals to 0.028% of the capital. To this amount, it should be included 889,000 shares, which the president possess through finance plans. As the result, he accumulates an estimated 0.045%, which at a current share price of 6.88€ (as to 31/10/19) has a value of 16 million euros. Ángel Vilá, the Chief Operating Officer, joined the purchase with 23,000 shares, or the equivalent market value of 137,600 euros. His participation increases to 0.02%, taking into account stock ownership plans [3]. Imagine we decided to invest 1,000 euros buying Telefónica shares at the same price as the company’s CEO did it. What would be like today our 167 shares market value? Would it have been a risky investment? We answer all these questions throughout the following section.

Stock Analysis for the Investor

Before reading this Financial Analysis which aims at answering Telefónica shares downward, and thereafter, its successful recovery in less than two months reaching almost 7 euros per share, it is important to take into consideration the different measures used. Please note that this analysis must not be used as a definitive basis to make any decision concerning buying and selling operations. This paper’s purpose is to illustrate an accurate stock analysis based on the corporation’s consolidated results from December 2016 to December 2018. This study has been realized using an investor perspective. Therefore, it has been chosen appropriate measures and calculations. These are cited briefly in the following:


Stock Market Main Measures & Calculations


-Price/Earnings Ratio ( P/E Ratio)
- Book Value Per Share (BVPS)
- Debt/Equity Ratio (D/E Ratio)

 

Other Financial Measures & Calculations
In order to reach accuracy with the results and conclusions, it has also been selected the following financial measures:


- Comparison of the company’s revenues and profits development
- Development of the total debt
- Dividend development


Through this three years analysis, the reader will be able to compare and understand different graphics elaborated to follow Telefónica stock price development and answer our previous questions regarding our 1,000 euros investment (at 5.98€ per share). Conclusions are exposed at the end of this research.


1. Price Earnings Ratio Development (Dec. 2016 - Dec. 2018)


As the graphic below shows, Telefónica share price has declined about 17% from December 2016 to December 2018. To this matter, I would like to point out the important rise of the Earnings Per Share (EPS), due to a positive increase of the company’s profits. EPS rose near to 0.76 in December 2018, which means a 58% climb through these three years. Despite the sustainable development of the EPS, Price Earnings Ratio (P/E Ratio) has shown an unbelievable decline from about 48%. These two indicators could be a clear sign for a possible undervalued stock with a powerful forward development of the EPS.

2. Book Value Per Share Development (Dec. 2016 - Dec. 2018)

The Book Value Per Share (BVPS) is also a common and appreciated indicator for the investor. BVPS holds the total stock value remaining for shareholders after all assets are liquidated an all debtors are paid. For Telefónica this measure has maintained established with only a slightly backward during 2017. To this matter, the investor must compare the BVPS value to the current share price. If the market price is too high, that could indicate an overvalued stock. On the contrary, if the share price is lower than the BVPS, that means the investor could have the opportunity to purchase stocks with strong value.

3. Debt/Equity Ratio Development (Dic. 2016 - Dic. 2018)


The purpose of the Debt/Equity Ratio (D/E Ratio) is to find out how well a company manages its total debt-financed by debtholders. The higher the D/E Ratio the riskier is the investment. Telefónica has an average D/E Ratio of 3.16. Hence the investor should assay this measure and avoid a possible rise, which would diminish the share price, due to an overindebted problem.

4. Comparison of the development of the company’s revenues and profits


In order to obtain unbiased results and conclusions, these two last sections are analyzed using a table. To this concern, Telefónica has successfully increased his profits throughout this period, but its revenues have diminished by about 4 billion euros. One possible reason could be a hard Brexit in the United Kingdom and the currency instability in Argentina mentioned above.

5. Development of the total debt


Another distressing information is the total amount of debt which holds today Telefónica. Therefore, it is important to remark the evolution of this measure throughout the years. Nevertheless, Telefónica has been able to manage a net financial debt diminishing of more than 6 billion euros or 14% in less than four years. In addition, cash and cash equivalents shew a 4% improvement in 2018, reaching nearly 4 billion euros. The comparison between D/E Ratio and the Net Financial Debt is a worthy sign for an investor, regarding a holding decision.

6. Dividend Development


Dividend payment is an appreciated method for shareholders, in order to gain a small amount of their invested money, as a distribution of the company’s profits. Investors may receive an attractive dividend provide that the company can afford the distribution of its profits. The dividend of Telefónica has seemed to undergo an important fall in comparison to that distributed before 2007-2008 financial crisis. A dividend diminishing is the result of the company’s restructuring and the proceed recovery from the subsequently crucial periods.

Conclusions from the Stock Analysis


Once obtained the results presented above, I shall endeavor the following conclusions:


1. P/E Ratio shows an important decline, despite the positive development of the Earnings per Share. This is a sign of a type of share, which i is performing stronger day after day in the Spanish stock market and which holds a healthy value. However, it is recommended to compare the  P/E with another Spanish telecommunications company, in order to establish which should be the average.


2. The investor may not take the decrease of the Book Value Per Share as a unique figure to make a decision of his investment. Taking into consideration the slight recovery of the BVPS, the investor must compare this measure to the current share price of the company. On 31st December 2018, the market price was 7.34€/share and the outstanding BVPS maintained at 4.035. This means that Telefónica was only trading at 1.8 times its BVPS. Seeking a sustainable BVPS value before buying a stock and comparing it to its current price is a key figure. The investor should avoid results exceeding 2.5 or 3 times BVPS.


3. The company’s D/E Ratio keeps at an average of 3.16 through these three years of analysis. The company has not shown significant advances on this measure.


4. The total revenues and profits demonstrate an essential rise. This supports the company’s profitable development.


5. Regarding the Net Financial Debt the investor should own up the successful management of the company’s leasing liabilities. Nowadays, the outstanding debt is estimated at 40,230 million euros. However, Telefónica is renowned as the only Spanish company with more than 8 billion euros of cash hand on hand at banks [8]. This last fact must be considered while looking for a potential respondence during tough financial situations.

 


As far as the concern of our questions mentioned above (What would be like today our 167 shares market value? Would it have been a risky investment?), our 167 shares bought a the market price of 5.98€ would be nowadays performing with a total value of 1,149 euros (as to 31/10/19). This would mean an initial profit of 150 euros, excluding the trading commissions and the upcoming dividend, which is expected to be paid at 0.20€/share on 19th December.

 


In addition, I would like to remark the importance of the cheap share price which is currently trading Telefónica. Notwithstanding, the investor should keep an eye on the net financial debt development, in order not to reach huge D/E Ratio results which would endanger his long-term investment. As Warren Buffett stated, “if you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes”. I encourage the individual investor to review with accuracy the respective financial reports from 2016 to year to date before reaching an investment decision, so as to avoid long-term repentance.

 

Reference and Endnotes


[1] Yahoo Finance (2019). Naturgy and Enagás Charts (16/16/19). Retrieved September 2, 2019, from https://finance.yahoo.com.
[2] Europa Press, Madrid (2019, 30 August). Alantra y New Street Research aconsejan ‘comprar’ Telefónica tras sus últimas caídas”. Retrieved September 2, 2019, from https://www.expansion.com/mercados/ 2019/08/30/5d691aaae5fdeaab308b45f2.html.
[3] Expansión (2019, 23 August). Álvarez-Pallete compra 100.000 acciones de Telefónica”. Retrieved September 2, 2019, from https://www.expansion.com/mercados/2019/08/23/5d5fca11e5fdea28048b45c9.html.
[4] Telefónica, S.A. (2016-2018). Historical share price data. Retrieved September 3, 2019, from https:// www.telefonica.com/en/web/shareholders-investors/share/historic-share-price-data.
[5] Telefónica, S.A. (2016-2018). Dividend history. Retrieved September 3, 2019, from https://
www.telefonica.com/en/web/shareholders-investors/share/dividend-history.
[6] El Economista. (2019, September 5). Telefónica, con 8.540 millones, es la empresa española con más dinero en caja, según Moody’s. Retrieved September 2, 2019, from https://www.eleconomista.es/empresas-finanzas/noticias/10068941/09/19/Telefonica-con-8540-millones-la-empresa-espanola-con-mas-dinero-en-caja-segun-Moodys.html.


Other references


[7] Telefónica, S.A. (December 2016). Annual Accounts 2016. Retrieved September 3, 2019, from https://www.telefonica.com/documents/162467/141705152/Individual-annual-report-2016.pdf/c1bdaa9c-e103-214f-93cf-d7b50ab0f487.
[8] Telefónica, S.A. (December 2017). Annual Accounts 2017. Retrieved September 3, 2019, from https://www.telefonica.com/documents/162467/141705152/Individual_Annual_Accounts_2017.pdf/5f25bada-e8a4-4975-61ca-a207dd38754f.
[9] Telefónica, S.A. (December 2018). Annual Accounts 2018. Retrieved September 3, 2019, from https://www.telefonica.com/documents/162467/141705152/Individual-Annual-Accounts-2018.pdf/0eec2340-4c54-8ea3-1fc7-8b3ad55339f5.


Annexe


[10] Morningstar Investing Glossary. Price/Earnings Ratio. Retrieved September 3, 2019, from https://www.morningstar.com/InvGlossary/price_earnings_ratio.aspx.
[11] Investopedia. Book Value Per Common Share - BVPS Definition. Retrieved September 3, 2019, from https://www.investopedia.com/terms/b/bookvaluepercommon.asp.
[12] Morningstar Investing Glossary. Debt-to-Equity Ratio. Retrieved September 3, 2019, from https://www.morningstar.com/InvGlossary/debt-to-equity-ratio.aspx.

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