Investmentidea: Ericsson AB

Ericsson AB, a Swedish telecommunications company published its full year 2016 results January 26, 2017. The report fell short of analysts’ estimates as a result of lower profits than estimated. Dividend was cut to SEK 1 from SEK 3 to support balance sheet and reset strategy.   

Reported sales decreased by -10% in 2016 mainly due to the lower demand for mobile broadband. Gross margin declined to 29.8% from 34.8% due to lower share of mobile capacity business, higher share of Global Services margins and sales, which declined by -6%, and lower IPR licensing revenues.

Operating expenses, excluding restructuring charges, decreased 8% as a result of the cost and efficiency program and lower amortizations of intangible assets. Operating income decreased due to lower sales and lower gross margin. Net income decreased and EPS diluted was SEK 0.52 (4.13) and EPS (Non-IFRS) was SEK 2.66 (6.06).

The share price of Ericsson rose sharply on the report to fall after the first hour of trading and is currently at 1% below the Bloomberg consensus 12-month target price of SEK 52.78. The share declined approximately 3% this year and lost 32% in the past 52 weeks.

SEB and Kepler Cheuvreux downgraded the stock to reduce on the report, with target prices reduced from SEK 48 to SEK 47 and SEK 52 to SEK 50. Ericsson’s focus going forward is to review priorities in order to set the future direction of the company and in the near term prioritize profitability over growth.

According to new President and CEO Börje Ekholm, emphasis will be on refining the strategy to focus investments into areas where Ericsson both can and must win to ensure forefront technological development.

Bloomberg consensus set the 12-month target price to SEK 52.78. Currently, 5 analysts set Ericsson on BUY, 16 on HOLD and 7 on SELL recommendation, which correspond to an aggregated HOLD rating.

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