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Telefonica SA ADR TEF

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Morningstar’s Analysis

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Capital Allocation


Downgrading Telefonica's Moat Rating to None, Lowering FVE; Asset Sales and Deleveraging Key

Javier Correonero Equity Analyst

Analyst Note

| Javier Correonero |

We are downgrading Telefonica’s moat rating to none from narrow, as we believe the company’s advantaged position in Spain and the United Kingdom as a result of effcient scale is not enough to offset its weaker position in Germany, Brazil, or Latin America. Although Telefonica is doing a good job of reshaping its portfolio by divesting no-moat divisions and crystallizing value through asset sales, the company’s returns on invested capital are close or just slightly above its cost of capital, leaving little margin for error, which reduces our certainty that the company will more likely than not be able to generate excess ROICs over the next 10 years. Our moat rating downgrade together with more moderate revenue growth and margin assumptions is the main explanation for our fair value estimate cut to EUR 4.90 from EUR 8.70 (our new fair value implies a 6.0 times terminal enterprise value/EBITDA multiple).

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Company Profile

Business Description

Telefonica operates mobile and fixed networks in Spain (where it is the incumbent telephone operator), U.K., Germany, Brazil, and other Latin American countries. The company derives approximately 30% of its revenue from Spain and 20%, 15%, and 15% from Germany, U.K., and Brazil, respectively. In Latin America, Telefonica also operates in Mexico, Argentina, Chile, Peru, and others.

Distrito Telefonica, Edificio Central. Planta 3, Ronda de la Comunicacion S/N
Madrid, 28050, Spain
T +34 914828700
Sector Communication Services
Industry Telecom Services
Most Recent Earnings Jun 30, 2021
Fiscal Year End Dec 31, 2021
Stock Type
Employees 111,490


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