UBS Internal Note Raises Questions On Analysts' Viewpoint on Ericsson
By BUSTER KANTROW DOW JONES NEWSWIRES
LONDON -- Is UBS Warburg talking out of both sides of its mouth when it comes to Telefon AB L.M. Ericsson?
After meeting with two top executives at the Swedish company last week, UBS analysts distributed a research note to European clients, saying they had heard "very little" to change their view on the company or the wireless-telecommunications equipment market.
But a memo that circulated internally at the bank's London office after the meeting painted a far more bearish outlook. The memo, a copy of which was seen by Dow Jones Newswires, said Ericsson expects sales in the first half of 2002 to be "very, very bad" and that, in apparent contrast to the company's public guidance, a rebound in the second half is far from assured.
UBS declined to comment on the memo, and it isn't clear whether details were disclosed externally. But, amid widespread investor unease in both Europe and the U.S. about the quality of investment research, the differences between the research note and the internal memo raise questions about whether UBS pulled its punches -- and if so, why.
Following the collapse of the dot-com economy and the implosion of once-admired companies such as Enron, analysts are under increasing pressure to take a more skeptical view toward the companies they cover, as well as to disclose more clearly any banking or other business relationships their firms have with those companies that might color their judgment.
Even as regulators consider measures such as stronger disclosure rules, banks have already taken steps to try to restore confidence in their research. On Monday, UBS rival Morgan Stanley adopted a new stock-rating system. The company is now rating stocks as overweight, equal-weight, and underweight, with each European and U.S. stock rated relative to stocks of similar companies.
The Ericsson memo was based on an internal briefing from a dinner meeting attended by UBS analyst Sofia Ghachem. Such memos are circulated daily within UBS and other banks to advise sales teams of topical issues. UBS, however, stressed that the memos don't represent its official view.
"Following yesterday's negative comments from Siemens and Nokia, UBSW had dinner with Ericsson last night," the memo said, referring to statements about the wireless market March 12 from Finland's Nokia Corp. and Germany's Siemens AG. "Ericsson warned that H1 systems will be very, very bad according to our analyst, and whilst they are still hopeful for H2 they say that there is nothing in place to drive H2.
"In fact they are saying that operators are dragging their feet on the data side of things with the vendors doing all the pushing [sounds like overcapacity to me]," the memo continued. "They also warn that until there are 3G handsets available there will be very little momentum in the sector. In contrast to Nokia, they are also warning that pricing remains weak in the 2G systems market."
The mention of 2G is a reference to the mobile networks currently used. Third-generation networks, which many operators have said they hope to begin rolling out later this year, will provide high-speed access to the Internet via mobile handsets.
For its part, Ericsson said the meeting, which lasted about two hours, was attended by Mats Dahlin, who oversees Europe, the Middle East and Africa for Ericsson's core systems unit, and Gary Pinkham, who is Ericsson's head of investor relations. Three UBS Warburg analysts attended the dinner. Mr. Pinkham said that "five or six" analysts for buy-side investment firms were also present. He declined to identify the buy-side analysts.
Ericsson insists that it hasn't backed away from its previous forecast for 2002. Mr. Dahlin reiterated that forecast in a presentation at the CeBIT technology fair in Hannover, Germany. He said Ericsson expects industry sales of mobile networking equipment to be flat to 10% below the total for 2001.
Ericsson has also said it expects its own sales to track, if not outperform, the overall market in 2002. Networks accounted for roughly 85% of Ericsson's fourth-quarter sales of 58.5 billion Swedish kronor ($5.69 billion or €6.45 billion). The company has said it expects sales for the first quarter to be in the range of 40 billion kronor and warned of a wide pretax loss. But Ericsson said its sales and profitability will improve markedly in the second half of this year.
Mr. Pinkham denied that either he or Mr. Dahlin said at the dinner that the systems market in the first half would be "very, very bad," pointing out that Ericsson would never make such a statement just hours after the CeBIT presentation.
"We explicitly said that there was no change to our market outlook," Mr. Pinkham said. "We've said that the market in the first half is going to be challenging."
Ericsson's investor relations chief added that he and Mr. Dahlin also said, as they have before, that sales are expected to pick up in the second half as 3G rollouts begin and General Packet Radio Service grows in popularity. Mr. Pinkham said Ericsson remains hopeful that operators will respond to growing traffic on their networks by increasing network capacity -- meaning buying equipment from suppliers like Ericsson.
Ericsson declined to comment on whether it has an investment banking or other business relationship with UBS Warburg. A UBS Warburg spokesman said he was unaware of any relationship.
-- Nathan Barker, Nic Fildes and Jack Grone contributed to this article.
Write to Buster Kantrow at buster.kantrow@dowjones.com |
