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On Dec 12, we maintained our Neutral recommendation on Ericsson (ERIC - Analyst Report). We are concerned about the company’s moderate third-quarter performance.

The company reported modest results for third-quarter 2013, with earnings up 26% year over year but a revenue decline of 3%. The decrease was due to currency fluctuations and weak sales in North East Asia as well as India.

Why the Reiteration?

On Oct 24, Ericsson reported Non-IFRS earnings (excluding losses from divestments and exit of the telecom and power cable operations) of SEK 1.31 (20 cents), in the reported quarter.  While the Zacks Consensus Estimate for the Non-IFRS earnings was 18 cents, earnings grew 26% year over year driven by lower operating costs and higher gross margins.

Revenues in the quarter declined 3% year on year and 4% sequentially to SEK 53.0 billion ($8.1 billion). Revenues were primarily impacted by currency fluctuations and weak sales in North East Asia as well as India.

Following the release of the third-quarter results, the Zacks Consensus Estimate for fiscal 2013 increased 5.8% to 73 cents per share. Moreover, the Zacks Consensus Estimate for fiscal 2014 also rose 3.6% to 86 cents per share.

Ericsson is the world’s largest supplier of LTE technology with approximately 13% share in the market and about 150 LTE networks worldwide. Moreover, post the acquisition of Telcordia, the company also became a leader in the OSS and BSS segment. Year to date (2013), Ericsson has received large contracts from leading telecom companies operating across the world. Some of these are, a $1 billion deal with a leading telecom operator in India, Reliance Communications, a three-year strategic tie-up with Mobile Telesystems (MTS) and another 4G/LTE deal with Switzerland's largest mobile operator Swisscom. During the third quarter, the company received LTE contracts from major telecom operators primarily in the Chinese markets.

The market for smartphones is accelerating at a rapid pace, consequently usage of mobile broadband is increasing. Therefore, with rising demand for coverage speed and quality, superior-performance networks have become a key differentiator for operators. 3G/HSPA coverage is expected to enhance worldwide, from over 50% of the population today, to 85% by the end of 2017. Therefore, operators come to Ericsson to expand network coverage and for higher speed and capacity of networks. Further, to maintain its superior performance there is  a continuous need for network tuning and optimization as traffic increases.

However, the current cost inflation is continuously burdening the price structure of the company by affecting its margins. In addition, Ericsson functions in an extremely competitive environment which comprises various big multinational wireless telecom service providers as well as newly established companies.

Other Stocks to Consider

Currently, Ericsson carries a Zacks Rank #3 (Hold).

However, some better-ranked wireless equipment stocks include Ubiquiti Networks, Inc. (UBNT - Analyst Report), Comtech Telecommunications Corp. (CMTL - Snapshot Report) and Harris Corporation (HRS - Analyst Report). Ubiquiti carries a Zacks Rank #1 (Strong Buy) while Comtech and Harris carry a Zacks Rank #2 (Buy).

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