How the European Telecoms Rank: BT Group plc (ADR) (BT), Telefonica S.A. (ADR) (TEF), France Telecom SA (ADR) (FTE)

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These have not been good times for the telecom service providers residing in the European Union of late. The ADRs of those firms, some behemoth-sized, have largely sold off. Fourth quarter gross domestic product in Europe fell slightly, indicating that the struggles may well persist. Still, there are likely some diamonds in the rough. European ADRs are usually good investments for their generous dividend yields, nevertheless. And they currently could prove to be trading at discounts with upside price potential. One exception has been BT Group plc (ADR) (NYSE:BT), a company I will highlight last among the group.

Telefonica S.A. (ADR) (NYSE:TEF)Telefonica S.A. (ADR) (NYSE:TEF)

Spain-based Telefonica also operates a unit covering Latin America and Telefonica S.A. (ADR) (NYSE:TEF) Europe. Amid a challenging backdrop, management is reorganizing the entity with its digital assets being the focus of activity. The strategy involves promoting the use of smartphones, enhancing its broadband offerings, and increasing network capacity, with the goal of becoming an international online and digital service provider group.

Efforts are being rewarded, as access lines are being added, largely through mobile and mobile broadband connections, as well as strength in Latin America. In all, for 2013, the company is guiding toward revenue growth with modest erosion in the operating margin. The forecast implies a turnaround, and this wouldn’t be too much of a surprise given the increased customer count.

Accordingly, TEF ADRs, yielding around 6% annually, may be poised for a rebound. Trading at significantly below 10 times trailing share earnings, the valuation is favorable. Management is also taking measures to reduce its sizable debt balance. In all, I recommend investors with a risk-tolerant total-return strategy consider the ADRs at this time.

Vodafone Group Plc (ADR) (NASDAQ:VOD)

This $125 billion market cap company is looking to growth in data services and emerging foreign markets to offset the effects of the sluggish European economy. The company is also targeting enterprises increasingly and adding new service offerings. As a result, mobile subscriber numbers are slowly on the rise and it is achieving growth in regions such as India. It recently, too, rolled out high-speed mobile services in South Africa, Italy and Greece.

The positive factors should be almost sufficient to offset weakness in Southern European markets this year. As profitability bounces back and conditions improve, Vodafone should return to previous form, if not better. Its long-term plan carries it through 2015, by which time it intends to have fully integrated its “Cable & Wireless Worldwide” business.

VOD is a company with a strong likelihood of a resurgence over the long term. With the shares priced at a sunken level, the current price might be a good entry point. Notably, VOD shares yield about 4% on an annual basis. Finally, the company remains fundamentally sound as compared with Telefonica S.A. (ADR) (NYSE:TEF), based on balance sheet ratios.

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