Spanish telecom giant Telefonica (TEF) will invest $14.6 billion in Brazil over three years (2011-2014).
This represents an increase of 52% over the last four years.
The company increased its investment to tap the growing demand for telecommunication services in Latin America. We believe Telefonica continues to invest in growth and transformation projects, fostering the development of broadband services (both fixed and wireless).
Latin America is one of the best performing regions and remains the principal growth region for Telefonica with a penetration rate of 99% at the end of fiscal 2010. The company reported solid growth in Latin America in the recently concluded quarter.
Brazil was the largest contributor to Latin America’s revenue that improved roughly 55% in the fourth quarter of 2010. Further, Telefonica bolstered its position in the country after acquiring the full stake in Vivo Participacoes (VIV) in October 2010. Vivo generated a massive 150% growth in revenue in the recently concluded quarter.
The consolidation of Vivo makes Telefonica the leader in Brazilian telecom market. It enables the company to offer full competitive bundled service and enhances its competitive position against America Movil (AMX). Telefonica merged Vivo with its Brazilian fixed-line voice and broadband unit Telesp (TSP), which is struggling to perform.
Telefonica is the leading telecommunications company in Spain by customer accesses, which has now become saturated with the penetration rate of more than 100%. We believe Telefonica’s dominant position in the Spanish telecom market and the strengthening position in the Brazilian market make it attractive for investment. The stock retains a Strong Buy rating with the Zacks #1 Rank for the short term (1–3 months).
However, for the long term, we are maintaining our Neutral rating as Telefonica remains challenged by a weak Spanish economy and ongoing reduction in mobile termination rates. We are also concerned about the company’s highly leveraged balance sheet, increasing competition (especially in Brazil and U.K.) and regulatory involvement, all of which may limit upside potential of the stock.
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