After a Rough Second Quarter, Ericsson Is a Better Investment
Edited by Hugo Dixon
Ericsson's second-quarter results were pretty awful. But that was as expected. The real bleeder is the mobile-handset business. Its operating margins may have improved from the minus 80% recorded in the first quarter, but they were still an astonishing minus 57%. But, fingers crossed, that should soon be history. From the fourth quarter, the Swedish group's handset business will be hived off into a joint venture with Sony.
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Ericsson's future rests on its infrastructure business. Here the signs are mixed. Sales managed to move ahead -- 15% for the quarter and 9% on an annual basis. But the outlook remains bleak. All Ericsson will say is that there will be flat to moderate growth for the full year. Given that first-half sales in the division were up 11%, that prediction could be consistent with a fall in the second half.
Moreover, Vodafone's latest comment that it is holding back on investment in advanced mobile networks makes grim reading. As customers tighten their belts, the Swedish group feels the pain. As Ericsson rightly points out, it cannot control the market but it can control costs -- or, at least, should be able to. In the past, excessive costs have been a big weakness. As a result, margins in the infrastructure division have been squeezed again. They are now only 1%. Fortunately, the Swedish group now has the bit between its teeth and is cutting costs with vigor. Moreover, it has promised to make even deeper cuts if the market deteriorates further.
Meanwhile, Ericsson has made a big improvement in cash flow. Inventory fell dramatically from 48.5 billion kronor ($4.6 million or 5.23 million euros) to 32 billion kronor between the first and second quarters. Most of this is because stocks of unsold handsets were just shuffled off to Flextronics, to which it has outsourced production. Even so, there has been a genuine improvement in cash flow. Strip out the cash from divestitures, and the company saw a small cash inflow of 900 million kronor, despite the operating losses.
The bottom line is that Ericsson is becoming battle-hardened. It is still a worse company than rival Nokia. But its shares are much cheaper as a multiple of sales and remain a better bet. |
