Ericsson's Undue Pounding
By MATTHEW CURTIN and ARINDAM NAG
Dow Jones Global Indexes | Global Stock Markets
Barrons Feb 3rd
THE RUSH TO SELL SHARES of LM Ericsson is a reminder of how sensitive investors are to mild earnings disappointment and sober forecasts, particularly in a sector as badly wracked by price competition as telecom equipment.
The Swedish concern's American despositary receipts (ticker: ERIC) plunged more than 6% early Friday, to 36.80, after the company reported a 14% earnings gain for the fourth quarter and lowered its targets for 2007.
But the months ahead may make the selloff look like at least a partial overreaction. After all, if you're confident that investing in an equipment supplier is the way the play booming global demand for mobile and broadband, Ericsson is a relatively risk-free way to do it.
Ericsson has stolen a march over its rivals in the industry-consolidation stakes. The Marconi acquisition under its belt and December's purchase of Redback Networks both look to be proceeding well. In contrast, Alcatel-Lucent (ALU) is a messy work in progress. The venture between Nokia (NOK) and Siemens (SI) is delayed.
An ever more leanly managed Ericsson generated more cash than expected in 2006, which ought to help it handle the above-average growth it expects in 2007, even if the industry as whole won't expand as fast as Ericsson was hoping.
Slippage in profit margins is easily attributed to an expansion of services activities that promise more durable, if less lucrative, sales growth. Costs associated with rolling out networks at Ericsson's pace inevitably weighs on profitability in the short term. Even so, Ericsson's margins remain far above peers'.
Ericsson has been gaining in share of the wireless market, with its dominance of the so-called WCDMA standard. On the handset front, the Sony-Ericsson venture has been positioning itself at the premium, music-playing end of the market, which looks savvy for now. It's certainly in better shape than Motorola (MOT), whose RAZR phone appears to have lost its magic. |
