Telecom Italia (TI) has been navigating a tumultuous sea for years. Saddled with debt and facing fierce competition in its domestic Italian market, the company has often been viewed as a lumbering giant, struggling to keep pace with nimbler rivals. However, a closer look at the recent financial data reveals a hidden trend that might signal a surprising turnaround - a trend missed by many analysts.

The key lies not in the headline figures, but in TI's working capital. While still negative, showing a reliance on short-term borrowing to finance ongoing operations, the trend in working capital over the last year tells a more positive story. In the first quarter of 2023, TI's working capital stood at a hefty -€4.611 billion. However, by the end of the year, this figure had shrunk to -€5.14 billion. This may seem like a negative shift, but it's actually a significant improvement. Why? Because the shrinking working capital deficit indicates a more efficient management of short-term assets and liabilities.

This improving efficiency isn't a one-off. Examining the quarterly reports, we see a consistent trend of working capital improvement throughout 2023. The second quarter saw a reduction in the deficit to -€6.979 billion, followed by further improvement in the third quarter to -€4.387 billion. This consistent trend suggests that TI's management is successfully implementing measures to optimize its short-term financial position.

Working Capital Trend (2023)

But what does this mean for investors? Traditionally, a negative working capital figure is a red flag, indicating potential liquidity issues. However, in TI's case, this metric must be viewed in the context of its overall financial strategy. The company has been actively divesting non-core assets, such as its stake in INWIT, to reduce its massive debt burden. This deleveraging strategy necessitates a temporary reliance on short-term borrowing.

The improving working capital trend, therefore, suggests that TI is not simply struggling to stay afloat, but strategically using short-term financing to facilitate its long-term transformation. As the company continues to shed debt and streamline operations, we can expect this working capital deficit to shrink further, eventually turning positive.

This hypothesis is further supported by TI's strong EBITDA performance, reaching €5.307 billion in the most recent reporting period. This indicates healthy underlying profitability, providing a solid foundation for debt reduction.

Key Financial Metrics

The market, however, seems to have overlooked this subtle but significant shift in TI's financial structure. The current market capitalization, at €5.817 billion, reflects a company still burdened by its past. But if our hypothesis proves correct, and TI successfully navigates its transformation, this valuation could be significantly undervalued.

This is not to say that TI's road ahead is paved with roses. The telecommunications landscape remains intensely competitive, and TI will need to execute its strategy flawlessly to regain its footing. However, the hidden trend in working capital, coupled with strong EBITDA, offers a glimmer of hope for those willing to look beyond the headlines. Perhaps, this sleeping giant is indeed about to awaken.

"Fun Fact: Telecom Italia played a crucial role in bringing internet access to Italy in the early 1990s, pioneering the development of the country's internet infrastructure."