Is Telefonica Undervalued?

Telefonica (NYSE: TEF) has been mentioned lately by many investors as being an example of throwing the baby out with the bathwater. Telefonica is a former government monopoly and the dominant telephone company in Spain. Due to fears of problems with Spanish debt, the stocks of many Spanish companies have been sold off in droves over the past few months, Telefonica included.

Telefonica, however, is far more than just a Spanish phone company. This international powerhouse is the third largest telecommunications provider in the world, behind only Vodafone (NYSE: VOD) and China Mobile (NYSE: CHL). Telefonica only generates 33% of its revenue in Spain. The company generates 40% of its revenues in Latin America and the remaining 27% is generated in various other European countries. In addition to its commanding presence in Latin America, Telefonica owns 8% of China Unicom (NYSE: CHU). This positions it well to capitalize on emerging markets growth.

At the market close on January 7, 2011, Telefonica had a price of $64.87. That gives the firm a TTM P/E ratio of 6.54. Historically, the five year average P/E ratio for Telefonica is 11.6. At first glance, this would indeed appear to be an undervalued company. Here is how those numbers compare to a few other large international telcommunications companies as well as to the industry averages.

This comparison appears to confirm that Telefonica is indeed undervalued on a TTM basis. However, as investors, we are well aware that past performance is no indication of future success. Therefore, we should look at this company’s situation now and attempt to project into the future before making our investment. The analyst consensus for the fiscal year ended December 2010 is $4.83 per share. This would give a P/E ratio of 13.43. The forward looking analyst estimate for the 2011 fiscal year is $5.14 per share. That would give a forward P/E of 12.62. Those numbers do not appear to represent a traditional deep value play.

Here is a comparison of the same figures for Vodafone (NYSE: VOD) and France Telecom (NYSE: FTE) respectively.

These numbers show that Telefonica is, at best, fairly valued relative to its peers. Vodafone would appear to be the best value play here on a forward P/E basis. Although France Telecom appears to be the cheapest of the three companies here, it is the only one of the three to have decreasing earnings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.