Smart Money article on ERICY:
L.M. ERICSSON (ERICY) | SWEDEN
SURE, SHARES OF telecom plays such as Qualcomm (QCOM) and Nokia (NOK) have gone through the roof, but it's
not too late to get in on the wireless revolution. There's another round of spending in the offing as consumers upgrade to
phones that double as Internet surfing devices. This is no Jetsons-style fantasy. Analysts expect the number of mobile
Internet subscribers to grow to 13 times today's 10 million in just two years.
Getting the technology in the hands of consumers requires more than just designing cool handsets. The entire system of
base-station transceivers and controllers, which relay the signals, has to be upgraded. That's where Ericsson comes in.
It has spent much of its history providing equipment to wireline carriers around the world. But as wireless exploded, it took
the lead in supplying equipment that makes the European cell-service standard, called GSM, work. The company has built a
37% market share. Now wireline carriers are clamoring for upgrades to wireless systems, which should push GSM
equipment sales up 17% each of the next three years. "That's the cool business that Ericsson has ? GSM ? and the reason
to own it," says Steven Chamberlain, portfolio manager of the Invesco European fund (sorry, no snapshot available), a top
performer that holds Ericsson shares. "In terms of the world market, 50% is GSM."
Maybe right now, but CDMA technology ? the standard supporting third-generation phones such as those that can access
the Internet ? will eventually lead the way. And Ericsson is well situated for when that happens, thanks to its purchase last
year of the infrastructure business of Qualcomm, which developed CDMA. Ericsson is now the only manufacturer of both
phones and equipment that can support all four major mobile systems ? CDMA, GSM, Japan's PDC and the United
States' TDMA. That is a big reason SoundView Technology Group analyst Matthew Hoffman, one of the first analysts to
call the company's turnaround, is estimating that Ericsson's earnings will climb 94% this year.
That would provide a big bounce for a company that has been through some tough times lately. Once the leader in the
handset business, Ericsson lost ground to Nokia and Motorola (MOT) last year as consumers lost interest in its aging line.
Though handsets account for less than a quarter of Ericsson's business, investors were keenly aware of that market-share
erosion, and the stock price got creamed. The company has since redesigned its handsets, and the first two new ones, the
T28 and the R380 (named one of Popular Science's Top 100 Products of 1999), are likely to do well, adding $1.1 billion to
sales this year. A third phone ? featuring CDMA technology ? is due out sometime in the second quarter.
Earlier this year, after Ericsson reported a 29% improvement in fourth-quarter earnings, its share price jumped 38% in just
two weeks. Even so, the stock has room to grow before it hits the kind of P/E multiples other market leaders are seeing.
"Ericsson will begin to look like Nokia and will be perceived as a winner as the mobile Internet comes to fruition,' vows
Hoffman. "Betting against Ericsson would be like betting against Cisco (CSCO) in the Internet space." |
