Entering text into the input field will update the search result below

Telefonica Is An Undervalued Defensive Stock

Mar. 06, 2020 2:34 PM ETTelefónica, S.A. (TEF)28 Comments
David Gordo profile picture
David Gordo


  • Telefónica's stock has been in a downtrend for years while real results have been improving.
  • In this article, I will value each of the individual units of the company using a DCF model.
  • Combining the valuation of each unit I arrive at a fair value of 8.52€ or $9.5 per share, 57.7% above the current market value of 5.4€ per share.
  • Although I do not expect the stock to generate outstanding returns, I recommend it as a defensive stock with a well-covered dividend of 7%.

The telecommunications business is highly competitive. Every year, consumers demand higher data caps and speeds at cheaper prices. These network upgrades require vast capital investments, and competition continuously forces companies to drive down prices in hopes of increasing market share.

Therefore, it should not be a surprise that the return of the STOXX Europe 600 Telecommunications Index for the last 5 years has been a disappointing -12.3% or -2.6% annualized.

Telefónica (NYSE:TEF) has not been immune to this competition. Its enterprise value has also been in a steady downward trend since 2015. At the start of 2015, it stood at ~107€ billion. Today, it is ~65€ billion, almost 40% less.

However, Telefónica's earnings have been improving since 2014, and in 2019 it achieved its highest underlying EBITDA in the last 6 years. The underlying EBITDA for 2019 was 16€ billion, compared to 15.83€ billion in 2018 and 15.51€ billion in 2014. Meanwhile, its CapEx (excluding spectrum purchases) has gone down from 8.15€ billion in 2014 to 7.28€ billion in 2019.

Nonetheless, the market only cares about the company's future, and Telefónica's future is full of opportunity. Thanks to the advancements made possible by 5G technology, Telefónica is in the center stage of industries that will see immense growth in the coming years.

what is telefonica stock worth

Telefónica's Plan for 2022

Telefonica 2022 plan

Source: Telefónica 2019 earnings presentation

In November 2019, Telefónica announced its new design for the company and its objectives for 2022. The basis of this new plan is simple, to promote opportunities for growth while leveraging the value of their infrastructure and improving efficiency. Thanks to this plan, Telefónica expects to achieve growth of >€2bn in revenues and a 200 basis points expansion in its operating cash flow margin. To achieve these, the board approved 5 decisions:

1. Prioritize Spain, Brazil, the UK, and Germany as key markets.

This article was written by

David Gordo profile picture
I am a Master in Finance student at IE and a CFA Level III candidate. My goal is to find reasonably priced growth and value stocks that are likely to outperform the market in the next few years.

Analyst’s Disclosure: I am/we are long TEF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.