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France Telecom S.A. (FTE) and Telefonica S.A. (NYSE:TEF) are undervalued and had been recently upgraded by analysts. Both stocks will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.

France Telecom S.A.

France Telecom, a France-based European mobile operator, provides telecommunications services to residential, professional, and large business customers under the Orange brand. FTE was up 5.18% and closed at $10.15 on March 4, 2013. FTE had been trading in the range of $9.46-$15.50 in the past 52 weeks. FTE has a low beta of 0.76.

On March 4, 2013, Morgan Stanley upgraded FTE from underweight to overweight.

In January, 2013, France Telecom had acquired 100% of the share capital of video sharing website, Dailymotion. According to Reuter's report, the company, which had acquired 49% of Dailymotion in January, 2011, had exercised an option to purchase the remaining 51% stake.

There are a few positive factors for FTE:

  • Higher operating margin of 16.2% and net margin of 8.2% (vs. the industry averages of 11.7% and 3.5%)
  • Stronger ROE of 13.3 (vs. the average of 5.3)
  • Lower P/E, P/B, and P/S of 5.4, 0.7, and 0.4 (vs. the industry average of 26.2, 1.6, and 1.0)
  • Lower Forward P/E of 4.0 (vs. the S&P 500's average of 14.0)
  • FTE generates an operating cash flow of $12.97B with a levered free cash flow of $4.67B
  • FTE currently offers an annual dividend yield of 9.97%

Risks
Iliad's entrance as the fourth wireless operator in France had expanded the market, but it had also forced France Telecom to reduce prices to compete. Morningstar expects FTE's revenues to decline continuously throughout 2013 as its existing contract base finishes rolling into lower priced plans. However, despite the increased competition, the stock remains undervalued.

Technically, the MACD (12, 26, 9) is showing a slightly bearish trend but could turn bullish anytime as the MACD difference continues to converge. The momentum indicator, RSI (14), is picking up but still indicating a bearish lean at 45.37. FTE is currently trading below its 50-day MA of $10.94 and 200-day MA of $11.80. The next support is $8.99, the S1 pivot point, followed by $8.21, the S2 pivot point, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

At the current price, FTE offers a great, steady income at a fairly low-risk price with its low Forward P/E of 4.0. For bullish investors, a credit put option spread of May 18, 2013 $7.50/$10 can be reviewed. Investors can also review the following ETFs to gain exposure to FTE:

  • STOXX European Select Dividend Index Fund (NYSEARCA:FDD), 3.89% weighting
  • SPDR S&P International Telecommunications Sector ETF (NYSEARCA:IST), 3.69% weighting
  • SPDR S&P International Dividend ETF (NYSEARCA:DWX), 2.94% weighting

Telefonica S.A.

Telefonica SA, a Spain-based company, mainly provides fixed and mobile telephony services in Spain, Europe and Latin America. TEF was up 3.66% and closed at $13.61 on March 4, 2013. TEF had been trading in the range of $10.06-$17.38 in the past 52 weeks. TEF has a beta of 1.02.

On February 28, 2013, TEF reported Q4 2012 earnings with adjusted earnings of 60 cents per ADS, which increased 28.5% year-over-year. For 2013, analysts are estimating an EPS of $1.62 with revenue of $78.87B, which is 1.60% less than 2012.

On March 4, 2013, JPMorgan upgraded TEF from neutral to overweight. On February 26, 2013, Bernstein also upgraded TEF from underperform to market perform.

There are a few positive factors for TEF:

  • Higher revenue growth of 2.8 (vs. the industry average of -2.7)
  • Higher operating margin of 17.4% and net margin of 9.4% (vs. the averages of 11.7% and 3.5%)
  • Stronger ROE of 31.6 (vs. the industry average of 5.3)
  • Lower P/E of 7.4 and P/S of 0.7 (vs. the industry averages of 26.2 and 1.0)
  • Lower Forward P/E of 6.5 (vs. the S&P 500's average of 14.0)
  • TEF generates an operating cash flow of $18.70B with a levered free cash flow of $10.10B

Technically, the MACD (12, 26, 9) is showing a bullish trend with diverging MACD difference. RSI (14) is picking up and indicating a bullish lean at 55.50. TEF is currently trading above its 200-day MA of $12.98 and is approaching its 50-day MA of $13.67, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

TEF continues to be a long-term buy with its steady cash flow and strong ROE. At current valuation with Forward P/E of 6.5, TEF remains undervalued. For bullish investors, a credit put option spread of June 22, 2013 $10/$12 put can be reviewed. Investors can also review the following ETF to gain exposure to TEF:

Intl Dividend Achievers (NYSEARCA:PID), 6.20% weighting

Note: All prices are quoted from the closing of March 4, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: France Telecom And Telefonica: Undervalued, Upgraded, And Strong Buys