Telefonica: A Buy on the Sovereign Debt Pullback

| About: Telefonica S.A. (TEF)
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I originally recommended Telefonica (NYSE:TEF) on November 6, 2006 (IWB #2699) at $58.23. The stock closed Friday at $68.79 (all figures in U.S. currency, unless otherwise stated).

Telefonica has been swept down by fears that Spain's sovereign debt will crater and take down the Spanish market with it. The stock is still about $10 above where I recommended it at $58.23 but it has pulled back approximately 22% from its high, which was $87.66. The stock is now trading at a 12-month trailing p/e ratio of less than 7 and is yielding 2.7%. I consider this a great entry point or an opportunity to add to an existing position as I have recently done myself.

On November 11, the company reported that third-quarter net profit nearly tripled, jumping to $6.98 billion ($1.12 a share) from $1.8 billion ($0.42 a share) in the previous year. This improvement was partially driven by Telefonica's purchase of a controlling stake in Brazil's Vivo Participacoes SA.

Telefonica's revenue rose 7.3% to $15.23 billion from $14.2 billion with a significant driver being stronger markets in Latin America and Europe, excluding Spain. The company reiterated its targets for the next two years and reaffirmed its dividends at €1.40 per share (about US$1.86) in 2010 and a minimum of €1.75 (US$2.33) by 2012.

Action now: Buy with a target $80.

Disclosure: I am long TEF.