On Dec 27, 2013, we upgraded the largest Brazilian telecom operator, Telefonica Brasil (VIV), to Neutral from Underperform.
Why the Upgrade?
We believe that the company’s focus on higher growth areas like data transmission and video services will deliver decent growth in the future. Further, the company’s bundled offering is gaining a competitive position and thus expanding its market share.
Telefonica Brasil’s long-term opportunity in mobile business remains attractive. Moreover, the company intends to continue being a launchpad for attractive post-paid and prepaid data plans. These plans are expected to help Telefonica Brasil to hold on to its leadership position in both data and post-paid segments.
The company is planning to deploy a nationwide 4G network and has accordingly signed a deal with Ceragon. Vivo is also focusing on areas with higher growth potential like data transmission and video services, which are believed to be accretive over the long term.
Telefonica’s fixed-line business is expected to benefit from the expansion of video, broadband Internet and Pay TV services. We believe the expansion in IPTV services coupled with DTH offering would drive growth in its fixed-line business. Further, Telefonica Brasil’s Speedy (offering top speeds of 30 Mbps) and FTTH networks of 100 Mbps will continue to enhance its performance.
However, fixed-line voice business is being exposed to competition from alternative services including wireless telephony, VoIP (voice over Internet Protocol) and cable services (voice, video and broadband).
Additionally, Vivo’s wireless business is struggling due to saturation in the Brazilian wireless market and stiff competition from its biggest rival America Movil S.A.B. de C.V.’s (AMX) Claro unit. Depreciation of the Brazilian real also remains a concern and forces us to maintain a balanced view on the stock.
Telefonica Brasil currently carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Companies operating within the telecommunication sector that are worth taking note of include Hawaiian Telcom Holdco Inc. (HCOM) and Chungwa Telecom Company Ltd (CHT). HCOM carries a Zacks Rank #1 (Strong Buy) while CHT currently holds a Zacks Rank #2 (Buy).