Ericsson Gets ‘Market Perform’ Despite Uncertain Start: Raymond James

By Mani
Updated on

Ericsson (ADR) (NASDAQ:ERIC) (ETR:ERCB), the number one provider of wireless networks and services to network operators worldwide, missed its first quarter targets, thanks to a maturing wireless market, note Raymond James analysts. Simon Leopold and the team at Raymond James, in their report dated April 23, 2014, however, maintained their Market Perform rating on Ericsson as ramps from Europe and China offer prospects.

Ericsson sales fell below estimates

The Raymond James teams point out that Ericsson (ADR) (NASDAQ:ERIC) (ETR:ERCB)’s sales of SEK 47.5 billion ($7.31 billion) for the first quarter of 2014 fell below their estimate of SEK 51.7 billion and the Street’s SEK 52.2 billion estimate, representing a 29.1% fall sequentially and decreasing 8.7% y/y.

Ericsson (ADR) (NASDAQ:ERIC) (ETR:ERCB)’s operating income of SEK 2.6 billion also missed analysts’ estimates of SEK 3.6 billion, despite a better-than-anticipated gross margin of 36.5%, as against their 33.4% estimate. Its EPS of SEK 0.90 / 14 cents too was below the analysts’ estimate of SEK 1.05/ 16 cents and below the consensus estimate of SEK 1.01/ 15 cents.

Segment analysis

Simon Leopold and the team at Raymond James present the following segment analysis of Ericsson (ADR) (NASDAQ:ERIC) (ETR:ERCB):

As can be deduced from the above table, the wireless network provider’s network sales came in at SEK 24.4 billion, representing 51% of total sales. Network sales fell 30% sequentially thanks to lower sales in North America and Japan, where large mobile broadband coverage projects are coming to an end.

Analyzing the global services segment, the Raymond James team points out that Ericsson (ADR) (NASDAQ:ERIC) (ETR:ERCB)’s professional services revenue of SEK 15.1 billion decreased 20% sequentially but increased 3% y/y as demand for consulting and systems integration services continues to be healthy with service providers focusing on improving network performance and increasing their operational efficiency.

The analysts note that Ericsson (ADR) (NASDAQ:ERIC) (ETR:ERCB)’s support solutions sales came in at SEK 2.8 billion, down 46% sequentially, but up 13% y/y. The analysts also point out that segment sales can be lumpy on a quarterly basis, driven by fluctuations in software volumes.

Valuation justification

The Raymond James analysts note that Ericsson (ADR) (NASDAQ:ERIC) (ETR:ERCB) currently trades at a 2015 P/E multiple of 14.8x their non-IFRS EPS estimate of $0.82/SEK 5.29. The following table provides comparisons for various technology companies:


The analysts believe Ericsson (ADR) (NASDAQ:ERIC) (ETR:ERCB) will continue to trade in line with the group as better dividend yield and EV/EBITDA are offset by lower top-line growth.



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