LM Ericsson (ERICY) 20 1/16 -2 1/2: Accentuate the negative is the theme today for ERICY sellers after the company posted a strong Q2, but lowered forward guidance for handset sales. Component shortage problems are certainly not exclusive to Ericsson, it is a common theme in the handset manufacturing business, you'll hear about it in regards to handset leader Nokia (NOK) and number two producer Motorola (MOT). Insufficient parts supply limiting finished goods production is not cheery news, but the upside is that at least demand remains strong. Parts suppliers will eventually catch up to demand and finished goods production will return to target levels. However, another trend in handsets is more troubling for Ericsson. As cellular phone usage has become more prevalent across demographic groups, lower-end handsets have become more popular and are accounting for a greater percentage of product mix. Ericsson has floundered in the lower-end, lower margin phones and is losing market share to Nokia and Motorola (to a lesser extent), who seem to be a step behind the consumer market, but at least a step ahead of Ericsson. Handsets account for about one third of Ericsson's business, and the division is currently operating at a loss, despite revenue growth of about 40%. The remaining two thirds of Ericsson's business comes from their Network Operators unit, and on this front, the company is making tremendous progress and appears poised to continue to take market share from Lucent (LU) and remain seated in the number one position worldwide. With the global wireless network buildout sure to boom in the years to come, we're puzzled as to why Ericsson doesn't ditch the handset business altogether and focus on networks. The company doubled their operating margins in Network Infrastructure in this last quarter, continues to reaffirm their R&D commitment and claims to be the technology and market share leader in the space. Ericsson's inability to perform in the consumer product market makes the company's insistence on sticking with handsets very questionable. -
Matt Gould, Briefing.com
Jim |
