Telefonica's (NYSE:TEF) shares have been beat up over the past year due to adverse macroeconomic conditions, strong competition and negative impacts from regulation. And the company's results show that. Although Telefonica was able to increase revenues 3.5% y/y in 2011, operating income before depreciation and amortization (OIBDA) margins fell 10.3 percentage points to just 32.2%. This slashed earnings by nearly 50% to 1.20 euros ($1.57) per share. Things in 2012 aren't expected to get much better as the company expects further OIBDA margin decline but it is expected to be less of a decline than in 2011. Revenues are expected to rise more than 1%. Telefonica is expected to pay a dividend of 1.30 euros ($1.70) per share, which is a yield of over 10% at current prices and exchange rates.
The negative market developments have sent the stock to very lows levels and the valuation metrics show this. All of the valuation metrics suggest that the stock is undervalued, even analysts who are clearly taking into account the current developments. As one of the largest telecom companies in the world, it's rare an investor is able to purchase such a large asset base for such a discount. Below is a closer look at the valuation metrics and chart.
Valuation: Telefonica's trailing 5 year valuation metrics suggest that the stock is undervalued as all of the metrics are below the company's respective 5 year averages. Telefonica's current P/B ratio is 2.6 and it has averaged 3.9 over the past 5 years with a high of 5.2 and low of 2.5. Telefonica's current P/S ratio is 0.9 and it has averaged 1.4 over the past 5 years with a high of 1.8 and low of 1. Telefonica's current P/E ratio is 10.5 and it has averaged 11.5 over the past 5 years with a high of 20.7 and low of 4.3.
Price Target: The consensus price target for the analysts who follow Telefonica is $22. That is upside of 36% from today's stock price of $16.51 and suggests that the stock is undervalued at these levels. This also suggests that the stock has significant upside and is an attractive opportunity at these levels.
Forward Valuation: Telefonica is currently trading at about $17 a share with analysts expecting EPS of $2.24 next year, an earnings increase of 24% y/y, for a forward P/E ratio of 7.4. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. France Telecom (FTE) is currently trading at about $15 a share with analysts expecting EPS of $2.1 next year, an earnings increase of 8% y/y, for a forward P/E ratio of 7. BT Group (NYSE:BT) is currently trading at about $34 a share with analysts expecting EPS of $2.81 next year, an earnings increase of 4% y/y, for a forward P/E ratio of 12.2. Vodafone (NASDAQ:VOD) is currently trading at about $27 a share with analysts expecting EPS of $2.71 next year, an earnings increase of 5% y/y, for a forward P/E ratio of 9.8. The mean forward P/E of Telefonica's competitors is 9.7 which suggests that Telefonica is undervalued relative to its publically traded competitors.
Top Stock Holders: The top two funds that own Telefonica are Loomis Sayles Strategic Income, which owns 19.6 million shares or 0.43% of the shares outstanding, and Loomis Sayles Bond Instl, which owns 2.6 million shares or 0.06% of the shares outstanding. The top two institutions that own Telefonica are Loomis Sayles & Company, which owns 24.2 million shares or 0.53% of the shares outstanding, and Templeton Investment Counsel, which owns 9.5 million shares or 0.21% of the shares outstanding.
Price Action: Telefonica is down 33.8% over the past year, underperforming the S&P 500, which is up 8.1%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $17.21 and below its 200 day moving average, which sits at $19.26.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.