Intrinsic value of Telefonica ADR - TEF

Previous Close

$11.00

  Intrinsic Value

$10.03

stock screener

  Rating & Target

hold

-9%

  Value-price divergence*

0%

Previous close

$11.00

 
Intrinsic value

$10.03

 
Up/down potential

-9%

 
Rating

hold

 
Value-price divergence*

0%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of TEF stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 55.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -5.24
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
  5.00
Revenue, $m
  54,920
  57,666
  60,549
  63,577
  66,756
  70,093
  73,598
  77,278
  81,142
  85,199
  89,459
  93,932
  98,628
  103,560
  108,738
  114,175
  119,883
  125,878
  132,172
  138,780
  145,719
  153,005
  160,655
  168,688
  177,122
  185,979
  195,278
  205,041
  215,293
  226,058
  237,361
Variable operating expenses, $m
 
  53,824
  56,364
  59,031
  61,831
  64,771
  67,858
  71,100
  74,503
  78,077
  81,829
  82,742
  86,879
  91,223
  95,784
  100,573
  105,602
  110,882
  116,426
  122,248
  128,360
  134,778
  141,517
  148,593
  156,022
  163,823
  172,015
  180,615
  189,646
  199,128
  209,085
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  49,148
  53,824
  56,364
  59,031
  61,831
  64,771
  67,858
  71,100
  74,503
  78,077
  81,829
  82,742
  86,879
  91,223
  95,784
  100,573
  105,602
  110,882
  116,426
  122,248
  128,360
  134,778
  141,517
  148,593
  156,022
  163,823
  172,015
  180,615
  189,646
  199,128
  209,085
Operating income, $m
  5,772
  3,842
  4,185
  4,546
  4,925
  5,322
  5,740
  6,178
  6,639
  7,122
  7,629
  11,190
  11,749
  12,337
  12,954
  13,601
  14,281
  14,995
  15,745
  16,533
  17,359
  18,227
  19,138
  20,095
  21,100
  22,155
  23,263
  24,426
  25,647
  26,930
  28,276
EBITDA, $m
  5,772
  13,074
  13,728
  14,415
  15,135
  15,892
  16,687
  17,521
  18,397
  19,317
  20,283
  21,297
  22,362
  23,480
  24,654
  25,887
  27,181
  28,540
  29,967
  31,465
  33,039
  34,690
  36,425
  38,246
  40,159
  42,166
  44,275
  46,489
  48,813
  51,254
  53,816
Interest expense (income), $m
  -2,262
  1,977
  2,165
  2,363
  2,570
  2,787
  3,015
  3,255
  3,507
  3,771
  4,048
  4,340
  4,646
  4,967
  5,304
  5,658
  6,030
  6,420
  6,830
  7,261
  7,713
  8,187
  8,685
  9,209
  9,758
  10,335
  10,940
  11,576
  12,244
  12,945
  13,681
Earnings before tax, $m
  3,425
  1,865
  2,020
  2,184
  2,355
  2,535
  2,725
  2,923
  3,132
  3,351
  3,581
  6,850
  7,104
  7,370
  7,650
  7,943
  8,252
  8,575
  8,915
  9,272
  9,647
  10,040
  10,453
  10,887
  11,342
  11,820
  12,323
  12,850
  13,403
  13,985
  14,595
Tax expense, $m
  893
  503
  545
  590
  636
  685
  736
  789
  846
  905
  967
  1,850
  1,918
  1,990
  2,065
  2,145
  2,228
  2,315
  2,407
  2,503
  2,605
  2,711
  2,822
  2,939
  3,062
  3,192
  3,327
  3,469
  3,619
  3,776
  3,941
Net income, $m
  2,500
  1,361
  1,475
  1,594
  1,719
  1,851
  1,989
  2,134
  2,286
  2,446
  2,614
  5,001
  5,186
  5,380
  5,584
  5,799
  6,024
  6,260
  6,508
  6,768
  7,042
  7,329
  7,631
  7,947
  8,280
  8,629
  8,995
  9,380
  9,784
  10,209
  10,654

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  7,061
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  130,493
  132,871
  139,515
  146,490
  153,815
  161,505
  169,581
  178,060
  186,963
  196,311
  206,126
  216,433
  227,254
  238,617
  250,548
  263,075
  276,229
  290,041
  304,543
  319,770
  335,758
  352,546
  370,174
  388,682
  408,116
  428,522
  449,948
  472,446
  496,068
  520,871
  546,915
Adjusted assets (=assets-cash), $m
  123,432
  132,871
  139,515
  146,490
  153,815
  161,505
  169,581
  178,060
  186,963
  196,311
  206,126
  216,433
  227,254
  238,617
  250,548
  263,075
  276,229
  290,041
  304,543
  319,770
  335,758
  352,546
  370,174
  388,682
  408,116
  428,522
  449,948
  472,446
  496,068
  520,871
  546,915
Revenue / Adjusted assets
  0.445
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
  0.434
Average production assets, $m
  59,088
  62,049
  65,151
  68,409
  71,829
  75,420
  79,192
  83,151
  87,309
  91,674
  96,258
  101,071
  106,124
  111,430
  117,002
  122,852
  128,995
  135,444
  142,217
  149,327
  156,794
  164,633
  172,865
  181,508
  190,584
  200,113
  210,119
  220,625
  231,656
  243,239
  255,401
Working capital, $m
  -16,335
  -5,767
  -6,055
  -6,358
  -6,676
  -7,009
  -7,360
  -7,728
  -8,114
  -8,520
  -8,946
  -9,393
  -9,863
  -10,356
  -10,874
  -11,417
  -11,988
  -12,588
  -13,217
  -13,878
  -14,572
  -15,301
  -16,066
  -16,869
  -17,712
  -18,598
  -19,528
  -20,504
  -21,529
  -22,606
  -23,736
Total debt, $m
  60,524
  61,869
  67,502
  73,418
  79,629
  86,151
  92,998
  100,189
  107,738
  115,666
  123,989
  132,729
  141,906
  151,541
  161,659
  172,282
  183,436
  195,148
  207,446
  220,359
  233,917
  248,153
  263,101
  278,797
  295,277
  312,581
  330,750
  349,828
  369,860
  390,893
  412,978
Total liabilities, $m
  111,330
  112,675
  118,308
  124,224
  130,435
  136,957
  143,804
  150,995
  158,544
  166,472
  174,795
  183,535
  192,712
  202,347
  212,465
  223,088
  234,242
  245,954
  258,252
  271,165
  284,723
  298,959
  313,907
  329,603
  346,083
  363,387
  381,556
  400,634
  420,666
  441,699
  463,784
Total equity, $m
  19,163
  20,196
  21,206
  22,267
  23,380
  24,549
  25,776
  27,065
  28,418
  29,839
  31,331
  32,898
  34,543
  36,270
  38,083
  39,987
  41,987
  44,086
  46,290
  48,605
  51,035
  53,587
  56,266
  59,080
  62,034
  65,135
  68,392
  71,812
  75,402
  79,172
  83,131
Total liabilities and equity, $m
  130,493
  132,871
  139,514
  146,491
  153,815
  161,506
  169,580
  178,060
  186,962
  196,311
  206,126
  216,433
  227,255
  238,617
  250,548
  263,075
  276,229
  290,040
  304,542
  319,770
  335,758
  352,546
  370,173
  388,683
  408,117
  428,522
  449,948
  472,446
  496,068
  520,871
  546,915
Debt-to-equity ratio
  3.158
  3.060
  3.180
  3.300
  3.410
  3.510
  3.610
  3.700
  3.790
  3.880
  3.960
  4.030
  4.110
  4.180
  4.240
  4.310
  4.370
  4.430
  4.480
  4.530
  4.580
  4.630
  4.680
  4.720
  4.760
  4.800
  4.840
  4.870
  4.910
  4.940
  4.970
Adjusted equity ratio
  0.131
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152
  0.152

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,500
  1,361
  1,475
  1,594
  1,719
  1,851
  1,989
  2,134
  2,286
  2,446
  2,614
  5,001
  5,186
  5,380
  5,584
  5,799
  6,024
  6,260
  6,508
  6,768
  7,042
  7,329
  7,631
  7,947
  8,280
  8,629
  8,995
  9,380
  9,784
  10,209
  10,654
Depreciation, amort., depletion, $m
  0
  9,232
  9,543
  9,868
  10,211
  10,570
  10,947
  11,343
  11,758
  12,195
  12,653
  10,107
  10,612
  11,143
  11,700
  12,285
  12,899
  13,544
  14,222
  14,933
  15,679
  16,463
  17,287
  18,151
  19,058
  20,011
  21,012
  22,062
  23,166
  24,324
  25,540
Funds from operations, $m
  14,132
  10,594
  11,017
  11,462
  11,930
  12,421
  12,936
  13,477
  14,045
  14,641
  15,268
  15,108
  15,798
  16,523
  17,284
  18,084
  18,923
  19,804
  20,730
  21,701
  22,721
  23,793
  24,917
  26,098
  27,338
  28,640
  30,007
  31,443
  32,950
  34,533
  36,194
Change in working capital, $m
  27
  -275
  -288
  -303
  -318
  -334
  -350
  -368
  -386
  -406
  -426
  -447
  -470
  -493
  -518
  -544
  -571
  -599
  -629
  -661
  -694
  -729
  -765
  -803
  -843
  -886
  -930
  -976
  -1,025
  -1,076
  -1,130
Cash from operations, $m
  14,105
  10,868
  11,306
  11,765
  12,248
  12,754
  13,286
  13,845
  14,431
  15,047
  15,694
  15,555
  16,268
  17,016
  17,802
  18,627
  19,494
  20,404
  21,359
  22,362
  23,415
  24,521
  25,682
  26,902
  28,182
  29,526
  30,937
  32,419
  33,975
  35,609
  37,325
Maintenance CAPEX, $m
  0
  -5,909
  -6,205
  -6,515
  -6,841
  -7,183
  -7,542
  -7,919
  -8,315
  -8,731
  -9,167
  -9,626
  -10,107
  -10,612
  -11,143
  -11,700
  -12,285
  -12,899
  -13,544
  -14,222
  -14,933
  -15,679
  -16,463
  -17,287
  -18,151
  -19,058
  -20,011
  -21,012
  -22,062
  -23,166
  -24,324
New CAPEX, $m
  -9,696
  -2,961
  -3,102
  -3,258
  -3,420
  -3,591
  -3,771
  -3,960
  -4,158
  -4,365
  -4,584
  -4,813
  -5,054
  -5,306
  -5,572
  -5,850
  -6,143
  -6,450
  -6,772
  -7,111
  -7,466
  -7,840
  -8,232
  -8,643
  -9,075
  -9,529
  -10,006
  -10,506
  -11,031
  -11,583
  -12,162
Cash from investing activities, $m
  -8,663
  -8,870
  -9,307
  -9,773
  -10,261
  -10,774
  -11,313
  -11,879
  -12,473
  -13,096
  -13,751
  -14,439
  -15,161
  -15,918
  -16,715
  -17,550
  -18,428
  -19,349
  -20,316
  -21,333
  -22,399
  -23,519
  -24,695
  -25,930
  -27,226
  -28,587
  -30,017
  -31,518
  -33,093
  -34,749
  -36,486
Free cash flow, $m
  5,442
  1,998
  1,998
  1,993
  1,986
  1,980
  1,973
  1,966
  1,959
  1,951
  1,942
  1,116
  1,107
  1,098
  1,088
  1,077
  1,066
  1,055
  1,042
  1,030
  1,016
  1,002
  987
  972
  955
  938
  920
  901
  882
  861
  839
Issuance/(repayment) of debt, $m
  682
  5,377
  5,634
  5,915
  6,211
  6,522
  6,848
  7,190
  7,550
  7,927
  8,324
  8,740
  9,177
  9,636
  10,117
  10,623
  11,154
  11,712
  12,298
  12,913
  13,558
  14,236
  14,948
  15,695
  16,480
  17,304
  18,169
  19,078
  20,032
  21,033
  22,085
Issuance/(repurchase) of shares, $m
  -4
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,387
  5,377
  5,634
  5,915
  6,211
  6,522
  6,848
  7,190
  7,550
  7,927
  8,324
  8,740
  9,177
  9,636
  10,117
  10,623
  11,154
  11,712
  12,298
  12,913
  13,558
  14,236
  14,948
  15,695
  16,480
  17,304
  18,169
  19,078
  20,032
  21,033
  22,085
Total cash flow (excl. dividends), $m
  4,250
  7,375
  7,632
  7,908
  8,198
  8,502
  8,821
  9,156
  9,508
  9,878
  10,266
  9,856
  10,284
  10,733
  11,205
  11,700
  12,221
  12,767
  13,340
  13,942
  14,574
  15,238
  15,935
  16,667
  17,436
  18,242
  19,090
  19,979
  20,913
  21,894
  22,924
Retained Cash Flow (-), $m
  -2,518
  -1,033
  -1,010
  -1,060
  -1,113
  -1,169
  -1,227
  -1,289
  -1,353
  -1,421
  -1,492
  -1,567
  -1,645
  -1,727
  -1,813
  -1,904
  -1,999
  -2,099
  -2,204
  -2,315
  -2,430
  -2,552
  -2,679
  -2,813
  -2,954
  -3,102
  -3,257
  -3,420
  -3,591
  -3,770
  -3,959
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  6,342
  6,622
  6,848
  7,084
  7,333
  7,594
  7,867
  8,155
  8,457
  8,774
  8,290
  8,639
  9,006
  9,392
  9,796
  10,221
  10,667
  11,136
  11,628
  12,144
  12,686
  13,256
  13,854
  14,482
  15,141
  15,833
  16,560
  17,323
  18,124
  18,965
Discount rate, %
 
  8.90
  9.35
  9.81
  10.30
  10.82
  11.36
  11.93
  12.52
  13.15
  13.81
  14.50
  15.22
  15.98
  16.78
  17.62
  18.50
  19.43
  20.40
  21.42
  22.49
  23.61
  24.80
  26.03
  27.34
  28.70
  30.14
  31.65
  33.23
  34.89
  36.63
PV of cash for distribution, $m
 
  5,823
  5,539
  5,171
  4,786
  4,387
  3,982
  3,575
  3,173
  2,782
  2,407
  1,870
  1,578
  1,310
  1,070
  859
  676
  522
  394
  291
  210
  148
  101
  68
  44
  28
  17
  10
  6
  3
  2
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Telefónica, S.A. provides mobile and fixed communication services primarily in the European Union and Latin America. The company’s mobile and related services and products comprise mobile voice, value added, mobile data and Internet, wholesale, corporate, roaming, fixed wireless, and trunking and paging services. Its fixed telecommunication services include PSTN lines; ISDN accesses; public telephone services; local, domestic, and international long-distance and fixed-to-mobile communications; corporate communications; supplementary and business oriented value-added; video telephony; intelligent network; and telephony information services. The company also leases and sells handset equipment, as well as provides Internet and broadband multimedia services comprising Internet service provider; portal and network; retail and wholesale broadband access; narrowband switched access to Internet; high-speed Internet services through fiber to the home; and VoIP services. In addition, it offers data and business-solutions services that include leased lines; virtual private network; fiber optics; hosting and application; outsourcing and consultancy; desktop; and system integration and professional services. Further, the company offers wholesale services for telecommunication operators, including domestic interconnection; international wholesale; leased lines for other operators’ network deployment; and local loop leasing under the unbundled local loop regulation framework, as well as bit stream services, bit stream naked, wholesale line rental accesses, and leased ducts for other operators’ fiber deployment. Additionally, it also provides Internet protocol TV, over-the-top network television, cable and satellite TV, and pay TV services; M2M connectivity platforms; and e-health or telecare, financial and other payment, security, cloud computing, advertising, big data, and future communication services. The company was founded in 1924 and is headquartered in Madrid, Spain.

FINANCIAL RATIOS  of  Telefonica ADR (TEF)

Valuation Ratios
P/E Ratio 21.5
Price to Sales 1
Price to Book 2.8
Price to Tangible Book
Price to Cash Flow 3.8
Price to Free Cash Flow 12.2
Growth Rates
Sales Growth Rate -5.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -2.3%
Cap. Spend. - 3 Yr. Gr. Rate -1%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 236.1%
Total Debt to Equity 315.8%
Interest Coverage -1
Management Effectiveness
Return On Assets 0.6%
Ret/ On Assets - 3 Yr. Avg. 1.2%
Return On Total Capital 3.1%
Ret/ On T. Cap. - 3 Yr. Avg. 2.5%
Return On Equity 14%
Return On Equity - 3 Yr. Avg. 10.5%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 52.3%
Gross Margin - 3 Yr. Avg. 52.3%
EBITDA Margin 2.1%
EBITDA Margin - 3 Yr. Avg. 3.6%
Operating Margin 10.5%
Oper. Margin - 3 Yr. Avg. 10.5%
Pre-Tax Margin 6.2%
Pre-Tax Margin - 3 Yr. Avg. 5%
Net Profit Margin 4.6%
Net Profit Margin - 3 Yr. Avg. 4.2%
Effective Tax Rate 26.1%
Eff/ Tax Rate - 3 Yr. Avg. 17.2%
Payout Ratio 122.7%

TEF stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TEF stock intrinsic value calculation we used $54920 million for the last fiscal year's total revenue generated by Telefonica ADR. The default revenue input number comes from 2016 income statement of Telefonica ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our TEF stock valuation model: a) initial revenue growth rate of 5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 8.9%, whose default value for TEF is calculated based on our internal credit rating of Telefonica ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Telefonica ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of TEF stock the variable cost ratio is equal to 93.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for TEF stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Telefonica ADR.

Corporate tax rate of 27% is the nominal tax rate for Telefonica ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the TEF stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for TEF are equal to 107.6%.

Life of production assets of 10 years is the average useful life of capital assets used in Telefonica ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for TEF is equal to -10%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $19163 million for Telefonica ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 5069.1 million for Telefonica ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Telefonica ADR at the current share price and the inputted number of shares is $55.8 billion.

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COMPANY NEWS

▶ [$$] Mexican Supreme Court Backs América Móvil on Interconnection Fees   [Aug-17-17 12:40AM  The Wall Street Journal]
▶ ETFs with exposure to Telefonica SA : August 16, 2017   [Aug-16-17 06:51PM  Capital Cube]
▶ Telefonica posts 2Q profit   [Jul-27-17 03:52PM  Associated Press]
▶ Nasdaq Tumbles as Tech Takes a Turn Lower   [01:37PM  TheStreet.com]
▶ [$$] Telefónica commits to UK as spectrum auction looms   [Jun-27-17 12:51PM  Financial Times]
▶ Telefonica Leads Europe in Move to Converged Services   [Jun-16-17 07:00AM  Morningstar]
▶ 10 High-Quality Foreign-Stock Bargains   [Jun-14-17 06:00AM  Morningstar]
▶ ETFs with exposure to Telefonica SA : May 31, 2017   [May-31-17 12:48PM  Capital Cube]
▶ [$$] Timeline of a hack: How WannaCry's secret weapon spread   [May-14-17 01:21PM  Financial Times]
▶ Spain says several firms hit by cyberattacks   [11:32AM  Associated Press]
▶ Spain says several firms hit by cyberattacks   [11:20AM  Associated Press]
▶ Telefonica posts 1Q profit   [May-11-17 03:16PM  Associated Press]
▶ Millicom Is Undervalued   [May-01-17 07:00AM  Morningstar]
▶ [$$] América Móvil Says Wireless Price War Has Eased   [Apr-26-17 01:15PM  The Wall Street Journal]
▶ The 3 Best International Telecom Stocks to Buy in 2017   [Apr-12-17 02:35PM  Motley Fool]
▶ Top Ranked Income Stocks to Buy for April 5th   [Apr-05-17 09:06AM  Zacks]
▶ Why You Need to Buy Today's Stock Market Dip   [Mar-21-17 04:49PM  Zacks]
▶ GPS SmartSole at CeBIT 2017   [Mar-15-17 09:00AM  Marketwired]
▶ Telfonica Stock Rises on Mixed 4Q Results   [Mar-10-17 10:08AM  at TheStreet]
Stock chart of TEF Financial statements of TEF
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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