Telecom and Media: A Profitable Business Partnership?

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Traditional phone companies have disappeared. Telephone companies today offer wireless services, satellite television, and broadband Internet in addition to landlines. Portugal Telecom (NYSE: PT), BCE (NYSE: BCE), and VIV Telefonica Brasil (NYSE: VIV) are some of the companies active in telecom that will be looked upon to assess these expanding prospects.

Competition immune

Canada’s largest communications company, BCE, has recently entered the multimedia business, and its main segments are: land and wireless phones, satellite communications and television, Internet and data services. Also, the firm has recently completed the acquisition of Astral and announced important debenture redemption.

Today, BCE is looking to improve cost reduction policies, capital investment, and labor skills in order to meet short-term profitability and revenue objectives. Additionally, new government regulation, bandwidth improvement, collective labor negotiations, and further acquisitions will be addressed. Tomorrow, the firm will benefit from a solid performance in the wireless segment, reduced customer erosion in the landline segment, and continued expansion of its media segment. Growth and improved performance will allow management to reward shareholders accordingly and complete a successful transition to the media segment.

Finances show that revenue and operating margin have stabilized during the last decade, while net income has seen an impressive growth. Total debt, in the same time, has seen a small increase. Today, the company holds one of the highest operating and net margins in the industry. All around, BCE is financially solid.

BCE trades at 12.6 times its TTM earnings, representing a 43% discount to industry averages, paying quarterly dividends of $0.5825 equal to a 5.58% yield at the current stock price. I recommended a buy: New competitors may pay a lower entry price, but keeping up competition will be difficult thanks to BCE’s market position and early transition to the media sector.

Mobile phone exhaustion

Headquartered in Sao Paolo, Telefónica Brazil, a.k.a. Vivo, provides communication, information, and entertainment solutions for 90 million customers. Although, recently the firm made the news due to a stock price drop, hedge funds have continued to increase their positions. Last, being part of Spanish Telefónica has given its Brazilian counterpart a great backing expertise and know-how.

Coming shortly, Telefónica Brazil will be faced with exhaustion of the mobile sector. Further down the road, it should focus on improving margins affected by TV subscription cancellations and tighter competition in the phone market. Hence, the company is expected to widen its subscription base for all segments, and expand its network in order to better exploit its market-leading position. Given the firm is expected to invest in the media sector, growth will be limited at first but holds promising prospects for the long term.

When looking at the balance sheet, the company’s standing is good. Revenue, net income, and cash flow have seen incremental increases in the last five years, while operating margin remains above 20%. In the last two years, however, debt has experienced a concerning growth. So long as cash volume is stable, debt will not be an issue, but it's worth watching.

Currently trading at 4.3 times its earnings, meaning an 80% discount to industry peers, paying quarterly dividend of $0.4762 which is a 5.77% yield, and a price tag very close to the 52-week low, the stock does look very cheap. However, I recommended to hold until Telefónica Brazil shows some success in the TV business as an option to mobile phone exhaustion.

Brazil will keep you afloat

Portugal Telecom is a telecommunications and multimedia provider, with activities in Portugal and Brazil mainly, and a smaller presence in Africa. The firm has recently sold its operations in Macau and is expected to open a new data centre in Covilha. But can the business produce profits in the back of a lagging economy?

In the short run, Portugal Telecom will be looking at the effects of Portugal’s recent agreements with the IMF, EU, and ECB. The other eye will be looking at a performance turnaround, as sales have stagnated and revenues have decreased since 2011. In the long haul, it has to wrestle with increasing competition, and continue improving services provided. However, amid economic difficulties in Portugal, further investments are not expected, meaning the company will not develop profitable options in the media segment.

During the last decade, revenue and net income have stagnated after an early rise. Operating margin experienced an early rise and then stagnated as well, standing today at the industry average. Additionally, debt has seen worrying hikes in the past few years, and cash flow reduced considerably. So, in all, Portugal Telecom is at a crossroads.

Trading at 13.6 times its earnings, carrying a 38% discount to industry earnings, paying quarterly dividends $0.3559 equal to a 6.85% yield, and a price tag close to the 52-week low, the stock is enticing. However, Telecom Portugal is expected to head towards more turbulence as the most recent dividends paid out have exceeded net income. It is recommended to hold until management addresses dividend payments and debt issues, and the Portuguese economy shows significant improving signs.

Answering the call

All three companies have managed to hold a leading position in their corresponding markets. Portugal Telecom has, however, made some mistakes with respect to dividends, while Telefónica Brazil will face obstacles around market exhaustion for the mobile segment and limited diversity in its business. BCE, however, has been responsible with dividend payments and finding profitable options to exhausting markets, and looks worthy of consideration.

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Vanina Egea has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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