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BCE Inc. (USA) (BCE), Telefonica S.A. (ADR) (TEF): Foreign Telecoms for Your Portfolio

The shares of numerous European and Canadian telecommunications providers look to have significant upside at their current valuations either for the near term or long term. I have selected several companies to discuss, and decide where to invest based on their income and balance sheet metrics. Stock recommendations will follow.

BCE Inc. (USA) (NYSE:BCE)

A Canadian behemoth

Canada’s largest telecommunications provider, BCE Inc. (USA) (NYSE:BCE), operates through four segments:

1. Bell Wireline is a traditional land-line service and broadband business. It contributes about 52% of revenue, as of the last quarter.

2. Bell Wireless is responsible for another approximately 29% of total revenue.

3. Bell Media owns BCE Inc. (USA) (NYSE:BCE)’s television and radio stations, and was created through the April 2011 purchase of CTV. Its revenue is about 10% of the company total.

4. Bell Aliant is a telecom provider serving mostly rural Canadian regions. Its revenue is about 9% of BCE Inc. (USA) (NYSE:BCE)’s overall.

The wireless division is experiencing rising profitability behind an enhanced subscriber count, along with increased data usage. These gains are being supported by higher smartphone usage, partly stemming from lower phone prices.

Elsewhere, Bell Wireline would benefit from an accelerated upturn in the Canadian economy. Such trends ought to support improved earnings comparisons for BCE Inc. (USA) (NYSE:BCE) in the second half of 2013 and over the long term.

Such is the basis for my recommendation of BCE Inc. (USA) (NYSE:BCE) shares for long-term price gains and a solid yield, currently 5.5%. The stock is trading at a forward P/E of 13.0 as of this write-up.

Spain and Latin America’s largest bouncing back

Telefonica S.A. (ADR) (NYSE:TEF) is composed of four divisions as a conglomerate with a nearly $62 billion market capitalization.

Foremost, its Telefonica S.A. (ADR) (NYSE:TEF) Latino America unit contributed 51% of June-quarter revenue. Secondly, Telefonica S.A. (ADR) (NYSE:TEF) Europe brought in another 47% of the total (within this group is Telefonica S.A. (ADR) (NYSE:TEF) de Espana at about 23% of overall revenue.) Finally, Telefonica S.A. (ADR) (NYSE:TEF) Digital and Telefonica S.A. (ADR) (NYSE:TEF) Global Resources together provide a modest 2% of total revenue.

The company’s access line count is climbing across all businesses, fueled by gains in Latin America. In particular, mobile lines as a count grew 2% year-over- year in the latest quarter, while mobile broadband subscriptions advanced 7%.

With company-wide revenue returning to a growth trend, and the implementation of efficiency improvement initiatives likely to take hold, Telefonica’s bottom line ought to rebound going forward. Company margins are already above average for a telecom (see ratios).

Therefore, Telefonica ADRs are suitable for an investor looking long term or with a focus on generating income.

European giant set for a rebound

Vodafone Group Plc (ADR) (NASDAQ:VOD) derives about 46% of its revenue from Northern Europe and Central Europe. Another 23% stems from Southern Europe. The remaining 31% is derived from Africa, the Middle East, and Asia Pacific markets.

The company could be on the cusp of a recovery in financial results, based on several catalysts:

1. Smartphone activations are increasing at a strong rate, again because of low cost availability.

2. New customer plans initiated last year are supporting growth in “integrated plans.”

3. The unified communications business is expanding through acquisition and fibre deployment

4. Vodafone Group Plc (ADR) (NASDAQ:VOD) is extending the reach of its 3G and LTE presences to 80% and 40% of its markets.

As such, operating income is apt to increase in the low- to mid-single-digit range this fiscal year (ends March 2014).

Vodafone Group Plc (ADR) (NASDAQ:VOD) shares are trading at a P/E of 11.6 times forward earnings. They also offer a favorable yield of 7.1%. Also in light of management’s focus on 2015, the stock should be considered as a long-term portfolio holding.

Former France Telecom showing improved results

Orange SA (ADR) (NYSE:ORAN), as of July 1, is now the operator of fixed, mobile, TV and Internet businesses in France and the U.K. Last year, 54% of total revenue was derived from the offering of “personal communications services” (mobile), while the remaining 46% was from home communication services, including voice and broadband.

Looking to 2014, income should begin to improve, given several factors:

1. Increased mobile-service revenue, as low-price offerings have boosted demand for cellphones.

2. Better results in its home country thanks to profitability measures.

3. The impact of a transformation program.

4. Stabilization of personnel costs.

5. Increased contribution from growth investments, including emerging markets and new services.

The shares are trading at a P/E of 6.2 on a forward basis. They have appeal for investors with a long-term view.

Summary

BCE Inc. (USA) (NYSE:BCE), along with these and other European telecoms, might be poised to gain ground in tandem with rising smartphone sales and possibly more favorable economic conditions.

Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Orange (ADR) and Vodafone. Damon is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Foreign Telecoms for Your Portfolio originally appeared on Fool.com is written by Damon Churchwell.

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