First Buy of 2012: TEF

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, 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.

4 thoughts on “First Buy of 2012: TEF

  1. Best wishes with your TEF buy. I don’t think it’s necessarily a bad buy at current levels, as it’s incredibly cheap. I imagine that you will make money on this investment, and perhaps even come out pretty happy when it’s all said and done. TEF is cheap right now, but I unfortunately purchased at an unattractive price…which is quite unlike me.

    For me, I stick with an investment thesis. I had an overwhelming concern about the dividend and sold. It turns out my concern was valid, and I think the dividend will be cut further. That doesn’t mean this is a bad investment, as a dividend cut is actually what this company needs to continue to service the debt and make it out of this mess ok. However, I’m a dividend growth investor and I like to see my investments continue to pay me to own them and give me yearly raises that outpaces inflation. I’m not saying that I will always stick to this thesis, but when a company has a large amount of debt, is going to have to continue to roll over debt at escalating levels, is cutting the dividend and having to pay out over $400k per laid off employee in their native homeland…well that just begs the question: “are there better places to put my money?”. I asked myself that question, and came to the conclusion that there are better places. Just my take.

    I wish you the best. You got in at a price point to where I think that you don’t have a lot to lose, even if they cut the dividend further. But..I do think you’ll have to be patient with this one.

    Best wishes!

    • Hey DM,
      Thanks for being the first to comment and leaving such a well thought out response. You and I have talked about TEF before and I completely understand where you are coming from and don’t disagree on your analysis. Debt is a problem and I’m hoping the debt is coming from the expansion in it’s growing market, South America. I also agree that the divi could be cut again. The divi was of secondary concern when I made the purchase and I agree with you it is possible it will be cut again. Only time will tell if this one works out to my benefit. Thanks for reading!

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