There's no denying that investors have racked up huge gains over the last two years. March 9, 2011 marked the two year anniversary of the S&P 500 bottom, from which the index has nearly doubled. This massive surge in stock prices has had me looking harder than ever for value. Don't get me wrong, I'm still fairly optimistic on the stock market, just not as optimistic as I was a year ago.
My recent search for value has me looking at companies that trade at low price/owner earnings ratios. Telefonica (TEF) is a company that keeps coming onto my "value radar". I recently listed the stock in an article "8 Tech Stocks With a Price to Owner Earnings Ratio Under 10".
Telefonica is the largest telecom in Spain. I don't have to remind you that Spain has been an area of concern for Europe's debt woes. This is one reason Telefonica has become so inexpensive. Shares are only up 4% over the last twelve months.
Telefonica has 287 million customers, of which 220 million are mobile subscribers. The company recently reported earnings of $2.99 per share versus estimates of $2.47 per share for the year ending 2010. Revenues were up 7.1% year over year.
The excitement for Telefonica isn't in Spain though. The company reported that Latin America now accounts for 43% of sales. According to a recent article in Barron's, Latin America subscribers account for 150 million of the 220 million total wireless subscribers. It isn't hard to imagine that the company's future growth will come from booming Latin America. It's estimated that less than 30% of revenue will come from Spain in 2012.
Telefonica trades at a reasonable 9.6 times 2011 earnings. The company has grown earnings at an annualized rate of more than 20% over the last five years. Revenues have also been strong, growing at an annualized rate of 10% over the same period. Telefonica trades at a price/owner earnings ratio of 8.18, making it a true value stock (for a detailed description of price to owner earnings, read this article). The company has a large but manageable debt load of $70 billion. Below are the valuation metrics for Telefonica.
Telefonica
Metric | TEF |
Market Cap | $114 B |
Recent Price | $25.25 |
Forward P/E | 9.63 |
Dividend Yield | 7.09% |
5 Year Div. Growth Rate | 39.10% |
Payout Ratio | 46.00% |
Price/Book | 3.4 |
Price/Cash Flow | 4.99 |
Price/Earnings Growth | 1.1 |
Price/Owner Earnings | 8.18 |
Return on Equity | N/A |
Debt/Equity | N/A |
Revenue TTM | $81.4 B |
Operating Cash Flow FYE | $22.3 B |
Capex FYE | $11.97 B |
Capex/Cash Flow FYE | 0.54 |
5 Year Rev. Growth Rate | 10.20% |
5 Year Cash Flow Growth Rate | 11.20% |
5 Year Earnings Growth Rate | 20.50% |
Net Profit Margin | 13.53% |
Current Assets | $29.73 B |
Return on Assets | 6.96% |
Long-Term Debt | $70.03 B |
As if the fair valuations weren't enough, Telefonica has a dividend yield above 7%. The company recently raised the dividend 14%, making its 9th consecutive annual increase. The payout ratio stands at only 46%.
As concerns over Europe will continue to surface in headlines, it will take time for investors to realize that the news isn't all that bad for Telefonica. Investors may have to be patient for shares to rise substantially. In this case though, patience will pay you 7% a year. It appears Telefonica could ring up big gains for investors.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TEF over the next 72 hours.
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