First Buy of 2012: TEF

by Mike

On January 6th I made my first buy of the year purchasing 360 shares of Telefonica SA (TEF).  On that day TEF hit a new 52 week low touching 16.53 a share with my entry price coming in at 16.59.  TEF had been on my watch list for several months and I had watched its price trend lower during that time as news of the EU debt woes continued to dominate the headlines and company specific news of a dividend cut combined to take its toll on the stock price.  Add in a substantial debt load and the question arises: why take the risk with this stock at all?

A fellow blogger, www.dividendmantra.com and whose example is largely responsible for the creation of this blog, asked himself the above question and answered it with a sell order.  I don’t disagree with DM’s decision in any way, I actually read both his buy post and sell post and commenting to get a feel for what DM was thinking the draw back of the stock was.  This difference in opinion is more valuable than most people realize.   However it does raise an interesting question: what makes one man’s buy another one’s sell?

I made the decision to buy TEF with eyes wide open concerning some of the challenges noted above.  After looking into some of the SEC filings and digging around on the web fo find out any news that was impacting the company I then asked myself two important questions.  First, are the current negative factors impacting the company short-term events or long-term problems?  Second, what are the prospects for the company going forward?

I think that TEF’s current problems, although real, are only short-term considerations.   Yes, the negativity over the EU debt crisis is worrisome, but ask yourself this: does the U.S. deficit of approximately 15 trillion USD cause you to worry that VZ or ATT will go out of business?  If your like me your answer is no.  Telecom is an industry in which the customers it serves will continue using those services regardless of what the economic background may be.  I’ve visited several countries and I can tell you that cell phone use is prolific across socioeconomic backgrounds.  The cell phone has become a need to many people and that trend shows no sign of stopping.

Continuing with the first question lets look at debt.  Telecoms naturally carry a large amount of debt and this is generally accepted due to the high and relatively consistent revenue that is generated from telecom services.  I will admit that TEF’s debt is on the high side of that normal range and it is my hope that management will begin to work on reducing it.  For now it seems serviceable. 

Now what about question two, what are the future prospects of the company?  This is what I really like about the company.  If TEF were just another stodgy telecom confined to the mature markets of the Euro countries it operates in I would not have been willing to accept the risk.  However, TEF generates almost half of its revenue from South America countries.  It has a large and growing presence in Brazil, Peru, Argentina, Colombia, Chile, Mexico, Panama and Ecuador to name a few.  These are markets that are still developing and may benefit the company as it expands in these areas.

Purchasing at the low end of a stock price cycle does not guarantee against possible losses, but it does give a small margin of safety.  I will hold TEF for several years and add to my position if it drops again.  We have not heard the last of the EU’s financial woes so I may just get my wish.

Leave me a comment on what you think of TEF as well as any purchases you’ve made this year.

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