On Apr 5, 2013, we downgraded wireless infrastructure equipment provider LM Ericsson Telephone Company (ERIC - Analyst Report) to Neutral from Outperform based on the company’s modest fourth quarter results.
Why the Downgrade?
Estimates for Ericsson have been declining ever since the company reported its fourth quarter results on Jan 31, 2013. Ericsson’s fourth quarter EPS of 17 cents was in line with the Zacks Consensus Estimate.
Following the release of the fourth quarter results, the Zacks Consensus Estimate for the current quarter and the next quarter has gone down 15.4% and 6.3%, respectively. However, for the year 2012, the Zacks Consensus Estimate is up 5.4% but for 2013, it remains unchanged. With the Zacks Consensus Estimates for both the current and next quarter going down, the company now has a Zacks #3 Rank (Hold).
Cause for Concern
The company continues to witness declining sales in its CDMA business. Further, Ericsson expects the declining trend to continue through 2013. Moreover, the impact of the ST-Ericsson split also led to the decline in the operating income. In addition, the company’s shift in its business mix from coverage to capacity is also expected to have an impact on the revenues at least till the first half of the year 2013.
However, the company’s increased focus on IPTV and its recent contract wins are expected to drive the company’s growth in 2013.
Med-Tech Stocks That Warrant a Look
While we prefer to wait and watch Ericsson as we see signs of improvement in the company's performance, other wireless equipment stocks worth a look are Interdigital Inc. (IDCC - Snapshot Report), Ubiquiti Networks Inc. (UBNT - Analyst Report) and Sonus Networks, Inc. (MMSI - Snapshot Report). All are Zacks #2 Rank (Buy) stocks.