Cabi again - ERICY:STRONG BUY
LARGE CAP
Ericsson (ERICY)
Ericsson acquires Qualcomm's Infrastructure Business
Summary
Ericsson acquired QCOM's infrastructure business, which we
believe is a net positive for the wireless industry in its
advancement to 3G and also a win win situation for both
companies.
ERICY gains engineering talent a valuable asset that is in
short supply and key to introducing new capabilities on a
timelier basis.
ERICY now has the opportunity to supply a greater portion of
its customers' needs as it will address a greater percentage
of their network.
ERICY will have a full complement of products - essential to
continue to be a top 3 player.
We reiterate our Strong Buy rating with a $35-40 price target.
Price Target Mkt.Value 52-Week
3/24/991 (12mo.) Div. Yield (MM) Price Range
USD 21.06 $35-40 $0.25 1.2% $42,056.8 $34-15
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
12/00E $1.30 16.2X !Zero Divide 9.6 $2.46
12/99E 0.95 22.2 !Zero Divide 12.8 1.87
12/98A 0.80 26.3 !Zero Divide 14.9 1.60
March June Sept. Dec. FY End
2000E $0.78 $0.80 $0.95 $1.30 Dec.
1999E 0.07 0.18 0.23 0.47
1998A 0.10 0.21 0.20 0.28
ROIC (12/97)
Total Debt (12/98) --
Book Value/Share (12/98) $3.90
WACC (12/97)
Debt/Total Capital (12/98) NM
Common Shares 1,997
EP Trend2
Est. 5-Yr. EPS Growth 20%
Est. 5-Yr. Div. Growth N/A
1On 3/10/99 DJIA closed at 9772.64 and S&P 500 at 0.
2Economic profit trend.
Ericsson is a leading system supplier for both wired and
wireless telecommunications equipment, including base stations
, mobile phones, equipment for wireless access to
telecommunications networks and mobile data communications;
its wireless handsets and infrastructure are marketed toward GSM,
TDMA and AMPS.
Investment Summary
In a move that has been rumored for weeks, Ericsson acquired
the infrastructure business including R&D resources of
Qualcomm. We believe the transaction is a net positive for
the wireless industry and should also be considered a win win
situation for both companies. With the resolution of all
IPR issues between the two companies the development and
advancement of third generation (3G) wireless systems can
continue without risk of potential litigation. 3G advances
promise the market an opportunity for wireless to become as
ubiquitous as our wireline phones of today. Thus, we believe
the industry opportunity for growth continues to look
brighter as these issues are now put to rest.
For Ericsson specifically, we believe the positive aspects of
the transaction can be summarized in three points:
First, Ericsson gains access to additional CDMA resources
including engineering talent from Qualcomm employees it
acquires as part of this transaction. With Rf engineers in
short supply, the ability to find a group of talented
individuals should be considered valuable. We expect the
integration of these individuals into the Ericsson
development team should provide the company an opportunity to
introduce new capabilities on a timelier basis.
Second, many of Ericsson's largest customers, like Vodafone
and Airtouch have found that they have more than one
technology deployed within their portfolio of networks. It
is the interest of such operators to ensure that there is a
valid and smooth migration path as new standards for 3G emerge
41. With the litigation having been settled the risk of
migration or lack thereof is removed. Additionally, Ericsson
now has the opportunity to supply a greater portion of this
large carrier's needs given that it will address a greater
percentage of their network.
Finally, Ericsson can enter the handset arena with a full
complement of product. We believe this is important as it
will insure that Ericsson maintain a presence in all
standards and that it can continue to be a top 3 player.
We continue to recommend Ericsson with a Strong Buy rating.
Given this transaction, Ericsson can address a greater
percentage of a rapidly expanding market. We expect a
revenue growth and earnings recovery to materialize during H2:
99 and believe that there will be growing enthusiasm for the
shares as the prospects of this phenomenon become visible.
Our twelve-month price target is $35-40. |
