We maintain our long-term Neutral recommendation on Ericsson (ERIC - Analyst Report), a network solutions provider, primarily engaged in manufacturing and selling wireless infrastructure equipment. The company’s leading market share and diversified portfolio have allowed it to retain a formidable position in the telecom industry.
However, due to the annual decline observed during the first quarter, primarily in net earnings and sales, we prefer remaining on the sidelines for the time being.
Ericsson, a dominant player in wireless equipment business, hugely benefited from the constant development in the wireless industry, especially in emerging markets. In addition, the escalating demand of the latest mobile devices for 3G and 4G services, tablets and smartphones is likely to drive the company’s overall revenue in the coming years.
Ericsson’s flexible cost structure helps the company mitigate the impact of sluggish sales trends on margins, while enabling it to quickly capitalize on the emerging opportunities. The company’s SG&A expenses have reduced by 3% to $868.5 million in the first quarter of fiscal 2012, reflecting the Ericsson’s ongoing effort to trim down expenses. Consequently, we expect an improvement in the company’s profitability moving forward.
The recent acquisition of Telcordia and BelAir Networks will facilitate Ericsson further, heightening its market share in mobile broadband platformgoing forward. We believe that the company’s initiative to set up various R&D centers in numerous locations will enhance Ericsson’s operational potential in future.
However, the leading telecom service provider is in competition with well-established players such as Aviat Networks, Inc. (AVNW - Snapshot Report), Ubiquiti Networks, Inc. (UBNT - Analyst Report) and Comtech Telecommunications Corp. (CMTL - Snapshot Report), on the basis of quality and service. Hence, Ericsson is obliged to reduce its selling price, production costs in order to attract customers and also maintain the existing associations which may appear to be costly.
Moreover, the slower-than-expected GDP growth and the economic uncertainty prevailing in the US economy are predicted to worsen Ericsson’s level of investment in network development, and consumer telecom spending. External factors like cost inflation and foreign currency fluctuation are also expected to adversely impact the company’s financial results through affecting its margin.
Given the balanced risk-reward scenario, Ericsson currently maintains a Zacks #3 Rank, which translates into a short-term Hold rating for the stock.