<From Briefing.com> Story Stocks
09:29 ET ******
Ericsson (ERICY) 14: The stock is trading at $11 in the pre-market after reporting Q3 results. While they reported $0.04, in line with expectations (corrected from $0.05), investors are focusing on the lower guidance for Q4. Ericsson adjusted its outlook for 2000 and now expects sales growth of 25% on operating margin of 6%-7%, which translates into a weak Q4. Nokia (NOK) is clearly taking handset market share from Ericsson as Nokia expects bullish Q4 results. While ERICY expects negative operating cash flow this year, ERICY confirms that its long-term financial targets remain unchanged: growing sales by more than 20% annually, a positive cash flow before acquisitions, and an operating margin of at least 10%...The more important announcement today is that Ericsson is shaking up its handset unit and may sell the unit completely. Handsets are not Ericsson's forte as they have had trouble making the division profitable (division will lose $1.1 bln in Q4) as there always seems to be some excuse: reorganization, a lack of components, a fire at their supplier, falling prices and a weaker replacement market. However, the company expects profits by the second half of next year. Handsets represent roughly 20% of sales whereas they are the world's largest maker of cell-phone infrastructure equipment which represents roughly two-thirds of sales. Ericsson will move Swedish and U.S. phone production to Asia, Eastern Europe and Latin America in order to free up plants for networks. This is a strong sign that they are considering selling the whole handset unit allowing Ericsson to focus on what it's good at: infrastructure equipment where they are number one in the world. In fact, the company just announced a $1.35 billion order from Germany's MobilCom. Ericsson is now a supplier in 16 of the 21 contracts for 3G networks. The argument for keeping the phone division is to allow the company to offer an end-to-end solution when 3G rolls out. Ericsson expects that by the end of 2001 some 90 3G-licenses will be issued to operators around the world, beginning in Japan and followed by an intensive build-out in Europe. The 3G rollout will begin later this year....Lehman downgraded the stock to Outperform from Buy this morning. This is a digestion period as the company will become less and less viewed as a cell phone maker and more as an infrastructure equipment play which is a positive step. We're a bit surprised at the extent of the sell-off as it should be viewed as a positive that the company is recognizing its handset problems and taking steps to rectify it. We continue to like Ericsson as a long term play but there will be some rocky periods as you can expect an ugly Q4 report.
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