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Stock Strategist

Market Underestimates Telefonica

The telecom is well positioned and has room to expand its margins.

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 Telefonica (TEF) is the incumbent telephone operator in Spain and, along with America Movil (AMOV)/(AMX), it is one of two dominant operators in Latin America. Thanks to its acquisition of E-Plus in Germany, it is the largest wireless operator by number of subscribers in the country. It is also the second-largest wireless operator in the United Kingdom.

Beyond its size, which provides Telefonica with scale by spreading its fixed costs over a large number of subscribers, we like the company’s move into converged services, bundling fixed-line services with broadband, pay television, and wireless telephony. The company has been the leader in this movement, which positions it well to benefit from this growing-momentum trend. We believe Spain is the country that is furthest along in this transition, driven by Telefonica. The company has also led the way in laying fibre in order to increase broadband speeds. Its fibre network in Spain now passes over 21 million premises, which is significantly higher than its competitors, Vodafone (VOD) and Orange (ORAN), in the country. We believe Telefonica’s positioning in Spain sets it up for continued long-term growth.

Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.