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Telefonica Brasil S.A. VIV recently unveiled an ambitious plan to expand its fiber-to-the-home (FTTH) broadband service across 20 new cities in Brazil. With this, the largest telecommunications firm in the country seeks to strengthen its position in the market and increase its coverage to underserved households across the nation.
The company reportedly serves about 7 million households in 87 cities in Brazil. Telefonica Brasil expects to more than double this tally to 15 million households within a span of three years. The company is likely to invest 26.5 billion reais ($7.8 billion) during 2018-2020 as part of its massive expansion strategy, bulk of which would be utilized for FTTH service for improved data speed.
The strategic move to focus on fixed-line broadband technology was largely fuelled by a saturated mobile market. The company expects to capitalize on the improved growth potential of the largest economic powerhouse in Latin America by focusing on healthy organic growth. At the same time, Telefonica Brasil expects to benefit from potential acquisition opportunities.
Telefonica Brasil has an attractive service territory as Sao Paulo is the center of economic activities in Brazil. We believe that the full integration of Vivo has helped the company offer fixed-line services throughout the nation and return to profitability. The company is offering bundled (fixed-line and wireless) services, which are improving its competitive position and expanding opportunities further.
Moreover, Telefonica Brasil is increasingly investing in technology upgrades and broadband network infrastructure expansion to retain competitiveness in a rapidly changing market. The company joined rival Claro for building backhaul infrastructure for 4G and 3G networks under a three-year contract that will fortify its Vivo brand. Telefonica Brasil is also planning to deploy a nationwide 4G network and has signed a deal with Ceragon to install the network across the country. Moreover, Vivo is focusing on higher growth areas like data transmission and video services.
However, the stock has underperformed the industry with an average loss of 4.3% in the last three months compared with a decline of 3.3% for the latter. Telefonica Brasil’s fixed line voice business is facing intensifying competition from alternative service offerings like wireless telephony, VoIP (voice over Internet Protocol) and cable services (voice, video and broadband). Competition in the local phone market is also fairly intense.
In addition, impact of wireless substitution remains high as a growing number of customers are taking advantage of discounted calling rate offers from national wireless operators. The company is experiencing revenue loss, especially in Pay-TV and Fixed access business units, owing to an increase in MMDS (Multichannel Multipoint Distribution Service) customer churn following spectrum acquisition by 4G operators.
Telefonica Brasil carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry worth considering are Nippon Telegraph and Telephone Corporation NTTYY and Telefónica, S.A. TEF, carrying a Zacks Rank #2 (Buy) and Shenandoah Telecommunications Company SHEN, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Nippon Telegraph has a long-term earnings growth expectation of 7.8%.
Telefónica, S.A. is currently trading at a forward P/E of 10.1x.
Shenandoah Telecommunications surpassed estimates thrice in the trailing four quarters with an average positive earnings surprise of 276.3%.
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Telefonica SA (TEF) : Free Stock Analysis Report
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