JDN, thanks for that link. I'm going to post a copy here so we can go back next year and review it - long after the link has been erased. We'll see if Mr. Bulkey's wisdom stands the test of time.
UPDATE: No Signs of an Upturn at Ericsson
Analyst: Chris Bulkey (3/24/99)
Shares of Ericsson AB (NASDAQ: ERICY) have fallen nearly 30% from recent highs and are down another $1.56 today to $21.00. After the close of trading Tuesday, the company warned that first quarter earnings will fall short of expectations.
Investors seem to have forgotten January's warning, in which CEO Sven-Christer Nilsson admitted that the year ahead would be challenging. This morning, Morgan Stanley Dean Witter cut its rating from 'outperform' to 'neutral' following this most recent warning.
Pinch Your Nose and Run
The news came as no surprise to us. When Ericsson pre-announced disappointing fourth quarter earnings (see story from 12/10/98), we told readers that it would be a precursor to future shortfalls. Specifically, we said 'pinch your nose and run.' At the same time we strongly recommended purchasing Nokia (NASDAQ: NOK/A), which is taking considerable market share from Ericsson.
CEO Nilsson said yesterday that this announcement was a 'confirmation, or a clarification' of what the company had said before. He indicated that first quarter sales growth could be as low as single digits compared with the 25% jump seen in last year's first quarter. Mr. Nilsson cited restructuring costs and slowing sales growth as the reasons for the shortfall. I'm not sure why he is focusing on non-operating charges as a reason for the bad quarter.
The main problem: Slowing growth in handset and telecom equipment sales--two areas in which the company continues to lose ground. In addition to market share loses to Nokia in the handset business, Alcatel (NYSE:ALA) and Siemens (NASDAQ:SMAWY) are also taking market share from Ericsson in certain other telecom equipment niches.
The company still expects to eventually boost sales at a 20% clip, betting on its new T28 phone and other new models to help it catch up with Nokia and Motorola (NYSE: MOT) in the second half of the year. But Susan Anthony, an analyst with Credit Lyonnais in London still thinks the company has challenges ahead. The first half of the year 'will be tough,' she says, 'but how tough is the question.'
Others think the sell-off has created a good buying opportunity. 'The next news on Ericcson should be good as products start coming out,' says Adrian Taylor, portfolio manager at Capel Cure Sharp. Though Ms. Taylor is correct in spotting a good trading opportunity, any run-up from current levels won't last.
CEO Nilsson is significantly lowering Street expectations to account for what the company described as 'flat expectations' when it issued its cautious statement in January. Investors who ignored the warning and helped bid the shares up more than 20% to the $29 area in the following month are now getting a rude awakening.
Beyond a short-term bounce, investors should continue to avoid the shares, as the company has shown no signs of a sustained earnings recovery. Any rebound in the stock over the next month or two will be short-lived. Ericsson has been losing ground to competitors like Nokia for several quarters now and until that trend shows signs of abatement, future earnings disappointments are probable.
CEO Nilsson has put a lot of negative news into the stock with multiple warnings of a challenging landscape and the announcement of a restructuring. This could cause the shares to rally at the first hint of good news or even at another tech stock rally (i.e., the run-up in January). Beyond that, however, expect the next earnings report to contain much of the same evidence of lost momentum.
Bottom Line
Take a look at Nokia, whose business is gaining momentum, resulting in a steady upward progression of earnings estimates. Though the company's shares have tripled in the last year, they still have more room to climb.
Tell us what you think in ERICY's Board
|
