What just happened to Telefonica?
Henry Clay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Telefonica (NYSE: TEF), the Spain-based global telecom giant, spiraled downward all day Friday, ending the day down close to 9%.
For those who expected that the worst was over for this much-pummelled, but still loved company (Fools give it a five-star CAPS rating), the fall came as a shock.
After all, the stock had already fallen more than 28% this year due to weakness in its home market and the likelihood of a smaller dividend in coming years. And news that the company was planning to list shares of its German unit, O2, came as a sign that management was serious about reducing its debt burden. Analysts at Nomura also halted their earlier sell rating in recent weeks, saying the stock had likely reached a bottom.
Many Fools were excited by the company's 17% dividend and large footprint in the growing markets of South and Central America, viewing the latter as a buffer against an even more strenuous downturn in the Spanish market.
But recent news conflicted with this emerging market thesis. On Friday, it was reported that new mobile phone users in Brazil grew by half a percent in June compared with a month earlier. This was only about half the rate of growth experienced in the January through May period.
Additionally, its Peruvian unit, Telefonica del Peru, reported second quarter earnings that flew in the face of the fast growing-market thesis. Operational revenue grew by just 1.4% from the period a year ago. With profits of just $4.3 million, the unit won't do much to boost its parent's European troubles.
A third issue adding to bearish calls was the relative performance of Vodafone Group (NASDAQ: VOD). The company is one of Telefonica's premier contenders in Europe, and is also viewed as a more agile and higher growth stock. But its second quarter earnings were less than impressive. Sequential service growth grew by just 0.6%, less than half the rate seen in the first quarter.
S&P downgraded Vodafone to Hold from Buy on the news and cuts its price target.
Many investors are asking themselves, if it's this bad for Vodafone, where does Telefonica stack up?
Average analyst forecasts call for a year-over-year earnings decline of 7.3% when Telefonica releases results on July 26. But bargain hunters should also note that the average price target, $12.43, is more than 10% above where the stock settled on Friday.
dramadary owns shares in Telefonica. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Vodafone Group Plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.