Telefonica Brasil: A Sleeping Giant?
Telefonica Brasil (VIV) is the second largest telecommunications company in Brazil. It is part of the Telefonica group, one of the largest telecommunications companies in the world. Each regional hub of the group is traded separately on the New York Stock Exchange.
Telefonica Brasil is a wonderful opportunity for investment because it is incredibly undervalued right now. Its market price per share fell drastically after their acquisition of VIVO, while their net income has more than doubled due to the acquisition. They have also undergone corporate restructuring to develop a more efficient management system. Also, unlike many other telecommunications companies, it also offers broadband and television, and it attracts significant interest from the Brazilian market in these fields.
The company currently has a market capitalization of 31.94 billion and an enterprise value of 33.81 billion, which means it can easily meet its debt obligations with its cash and cash equivalents something which is rare for a telecommunications company. Its total debt to equity is just 15.95, and its current ratio is 1 which also shows it can easily meet its debt obligations. Furthermore, it has a forward P/E value of 9.98, showing that investors expect significant growth from the company in the coming years.
VIV is also an attractive investment if you examine its profitability. Its return on investment is 16.82, its operating margin (TTM) is 19.51%, its profit margin is 14.95%, and its return on equity is 15.86%. Its earnings yield is 8.8% compared to 6.5% from the S&P 500. All these figures point to strong profitability and very good margins in their sales.
The growing market in Brazil, where it conducts all its operations, is another indicator of success for this company. Its economy is now over $2.5 trillion in size and it is set to surpass France this year as the world's fifth largest economy. The telecom industry represents 5% of the GDP of Brazil and the industry is expected to grow in excess of 30% over the next four years. Also, smartphone sales in Brazil were up more than two thirds in Q4 2011 compared to Q4 2010.
In 2011, Telefonica Brasil reported cash flow from operations of $8.141 billion and free cash flows of $3.488 billion. Its capital expenditures were $4.654 billion. This means it is spending a large portion of its money on infrastructure and other capital expenditures, which shows it is expanding quickly.
If you need any more reason to buy this company then you should also examine the dividends it offers. In 2011, it paid out a total of $2.79 in dividends, a yield of 9.7%. This was a 180% increase from the dividends paid in 2010. It pays dividends three times a year: once in December/January, once in March/April, and once in October. This year Morningstar believes it will pay out 7% in dividends whereas on average in the S&P 500 dividends paid out are expected to be 2.4%.
The current price per share is $28.33, $18.33 off the high it recorded in June 2011 after its collapse due to buying VIVO and corporate restructuring. Both of these moves were beneficial for the company, and it should not have dropped.
CAPS currently rates this stock as a 5-star stock, while Morningstar puts its fair value at $31.00. It is due to release earnings at the start of May, and the earnings are likely to be very healthy due to the huge growth in Brazil of the telecom market.
I wrote this article because people have been talking about Telefonica S.A. (TEF) a lot recently, another branch of the Telefonica Group, but they have seemingly passed up Telefonica Brasil. Telefonica S.A. has some exposure to the Spanish crisis (30% of its revenues come from Spain, and a debt to equity of 306.42). Consequently, it seems crazy to me that that would be considered a fantastic buy without this also be considered the opportunity of a lifetime.
By Rupert Nicholson
All my statistics come from morningstar.com and my own research in the company from various websites.
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