Ericsson New Coverage Launch By Trefis: $13 Price Estimate

+22.79%
Upside
5.51
Market
6.77
Trefis
ERIC: Ericsson logo
ERIC
Ericsson

Ericsson (NASDAQ:ERIC) is a global telecommunications equipment and services provider based in Stockholm, Sweden. It is the leading supplier of mobile networks with products in CDMA, 2G, WCDMA/3G as well as 4G/LTE technologies. It is also a strong player in fixed-network solutions including copper, fiber, microwave transport and Internet Protocol. Established in 1876 as a telegraph equipment repair shop, Ericsson today employs more than 110 thousand individuals in 180 countries generating revenues close to $33 billion. With a portfolio of more than 37,000 patents from its 25,700-employee R&D unit, Ericsson is also one of the leading providers of ICT services such as systems integration, m-commerce and consulting, which contributes about 40% of its revenues.

We recently launched coverage of Ericsson with a price estimate of $13, about 20% ahead of the market price.

See Full Analysis for Ericsson Here

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Ericsson’s Business Segments

We have broken down our analysis of Ericsson into three main business segments:

  1. Networks -57% of value
  2. Global Services – 28% of value
  3. Support Solutions – 7% of value

Ericsson has been a leader in the mobile infrastructure market, controlling more than a third of the global revenues consistently for the last five years. Although its strong hold in CDMA has not benefited Ericsson very much recently because of the technology shift in the market to 4G/LTE, the communications major has benefited from increased demand for mobile broadband equipment including packet core, IP routers and microwave-based backhaul. The company’s focus on ensuring a smooth migration of customers from CDMA to 3G and 4G/LTE technology helped the company improve sales in 2013 and 2014. We expect the 3G/4G transition in developing economies to help maintain its market leader position, although its absolute share might drop a little.

We believe Ericsson’s strategy to focus on growth in ICT services and solutions will reap dividends in the near to medium term. The telecommunication industry is rapidly changing into a fully integrated hardware-software-services industry based on the Internet, and Ericsson will do well if it continues to evolve its network hardware dependent structure into a service and solutions-based one. Its recent acquisitions, including BelAir in the field of mobile broadband, ConceptWave in OSS (Operations Support Services), Telcordia in BSS (Business Support Services), Technicolor’s broadcast services division and Sentilla, Fabrix Systems, Apsera and MetraTech to boost its cloud-based support services, are an indication of the company’s changing focus towards software-based solutions.

Key Trends Affecting Ericsson

With a market share of about 32%, Ericsson leads the Mobile (Wireless) Infrastructure market (along with the Chinese major, Huawei), which totaled above SEK 300 Billion ($43-44 Billion) in 2014. Mobile infrastructure contributes about 40-43% of the company’s revenues, and this is expected to continue in the near to medium-term owing to Ericsson’s ability to evolve with the dynamic global market. Ericsson currently leads the global 4G/LTE marketplace with five out of seven tier 1 operators in North America among its customers (Verizon (NYSE:VZ), AT&T (NYSE:T), Sprint (NYSE:S), T-Mobile (NYSE:TMUS) and Rogers). We can see a potential upside in the company’s value if it consolidates its strong 4G position and effectively competes with other major players such as Huawei, Nokia (NYSE:NOK) and Alcatel-Lucent (NYSE:ALU).

Ericsson’s Networks EBITDA Margin has fluctuated between 26% (2009) and 16% (2012), settling near 21% in 2013 and 2014. Margins suffered in 2011 due to R&D expenditures; and in 2012, they were negatively impacted due to lower sales and an adverse product mix. A greater focus on coverage expansion than capacity building, coupled with the modernization drive in Europe a couple of years ago also had an adverse impact on profitability. Going forward, we expect the Networks EBITDA margin to slightly decline in the near term because of more Chinese contracts (which are low margin) before stabilizing around current levels by the end of the forecast period.

If the new upgraded equipment in Europe and capacity building measures improve profitability to historical 25% levels by the end of the forecast period, we could see a potential upside of about 10% to our price estimate. However, if the Chinese manufacturers pose such competition for Ericsson that it can’t increase margins any further than its 2012 levels, then we could see a potential downside of about 12-13% to our current price estimate.

Ericsson’s Support Solutions EBITDA Margin declined from about 20% in 2009 to 7.3% in 2010 before rising to 23% in 2014. The decline in 2010 and 2011 was attributed to revenue management and lower sales due to turmoil in the Middle East and a weak Indian market during that time. Going forward, we expect the EBITDA margins to drop in the short term before stabilizing to reach their average historical levels by the end of the forecast period. However, Ericsson’s focus on OSS, BSS and m-commerce services provides a good upside potential to its value and its recent acquisition of Telcordia and ConceptWave will further help consolidate its position in this diversified market.

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