Investment idea: Telefonaktiebolaget LM Ericsson
After a weak year, one of the global leader in network building wants to focus on its core competences.
Worldwide, the company has 116,416 employees from which 16,009 are located in Sweden. Ericsson’s portfolio encompasses over 42,000 granted patents.
In the previous year, Ericsson faced several difficulties. Sales decreased 9.8 percent, the EBIT fell 39 percent and the net income declined 43 percent.
Ericsson’s new CEO announces reconstruction
Consequently, Ericsson’s new CEO Börje Ekholm announced a reconstruction of the company and quantifies the corresponding costs to EUR 840 Mio. Since several global telecommunication projects were finished and the transformation to next generation 5G will take place before 2020, Ericsson plans to strengthen its Digital Service Business and the IoT (Internet of Things).
In detail, Ekholm declared: "For some time Ericsson has been challenged on both technology and market leadership and the group strategy has not yielded expected returns. In our strategy review we have listened carefully to customers around the world and made an in-depth analysis of our portfolio and performance. To enable us to immediately take action and move with speed in execution we are today outlining our path to restoring profitability and to lead with innovation and best in class solutions in areas we have decided to focus on."
Capital market experts assume multiple difficulties
The announced adjustments are understood by the US investment Bank Goldman Sachs as trustworthy and necessary for regaining growth and profitability. Consequently, Ericsson was labelled with “Buy” and a target price of SEK 69. >
According to Handelsbanken Capital Markets, the necessary focus on customers may suffer under these difficult circumstances and thus could result as value destructive. Further, a proper adjustment or solution of the deficient business units “media” and “IT & Cloud infrastructure” have to be found. Even in case of a sell, writedowns of approximately SEK 20 billion could be necessary. Hence, Handelsbanken recommends “Reduce” of the share.
According to Bloomberg, six analysts recommend a purchase of the stock, 14 suggest a hold and eight analysts recommend a sell of the stock. The current share price of Ericsson is SEK 58,20 and the average target price amounts to SEK 56,87. The trailing P/E ratio is 109,81.