In keeping with the trend... here's another good story on Ericsson from the AP wires.... lots of good information, including earnings UPGRADES for '98 and '99 from the brokerage houses (as opposed to earnings downgrades for some competitors...). Kind of long, but has good info. on why Ericsson may be undervalued now...
DWB
Europe Stock Focus: Valuation Makes
Ericsson A Bargain
By JAN LINDROTH
AP-Dow Jones News Service
STOCKHOLM -- Shares of Telefon AB LM Ericsson (ERICY) may be
undervalued by up to 20% at current prices, analysts say.
The Swedish telecommunications concern posted stunning profit growth of
70% in 1997, but anticipates lower selling prices for mobile-telephone
handsets in 1998. In addition, market-watchers warn that Asia's financial
crisis could pose a threat if it spreads to China.
Nevertheless, onlookers say Ericsson stock has plenty of room to rise. 'The
share still has great upside potential and is a strong 'buy,'' said Gunnar
Andersson, chief telecommunications analyst at Handelsbanken in
Stockholm.
Ericsson stock climbed SEK1.00, or 0.3%, on the day Friday to settle at
SEK331.50, leaving it 11% higher so far in 1998. Many observers consider
the shares a bargain.
'At the current price, we see the share as undervalued and have a target
price of SEK400.00,' said Laurent Douillet, analyst at Lehman Brothers in
London. The investment house raised its 1998 earnings-per-share forecast
for Ericsson 3% to SEK13.80 after the 1997 results, released last month,
exceeded expectations slightly, and Bear Stearns boosted its target to
SEK15.19 from SEK13.77.
Ericsson posted pretax profit of SEK17.22 billion in 1997, up from
SEK10.15 billion a year earlier, making it the most profitable company in
Swedish history. In the fourth quarter of 1997, pretax earnings rose 77% on
the year to SEK6.89 billion from SEK3.89 billion.
When Ericsson released the 1997 results, its board said chief executive and
President Lars Ramqvist would resign those offices and assume the duties of
chairman at the March 30 annual general meeting. Ramqvist will be replaced
as CEO and president by Sven-Christer Nilsson, head of Ericsson's Cellular
Systems-American Standards unit, another factor that analysts consider
positive.
At a price of around SEK330.00, Ericsson shares trade at a price/earnings
ratio of about 20. Most pundits believe that's too low for a fast-expanding
technology company that has boasted double-digit growth in sales and
earnings for most of the 1990s.
'The current valuation of the share is not very aggressive, considering how
quickly the company and its profits are growing,' said Jan Ihrefeldt, analyst
at FoereningsSparbanken in Stockholm. The lender rates Ericsson stock a
long-term 'buy.'
With their assessments of the stock's prospects so positive, analysts say it's
concern over the fallout from the Asian crisis that has deterred investors and
thus weighed on the share price.
Ericsson stock stood at SEK364.50 at the end of the third quarter of 1997,
but fell as low as SEK273.50 in December before recovering somewhat to
end the year at SEK298.50. However, the stock remained 14% below its
1997 peak of SEK384.00 at Friday's close.
'I think that investors got more scared than analysts by the Asian turbulence,
but the latest results and signals from Ericsson show that the analysts are
right,' said one London-based market-watcher.
Nevertheless, onlookers say the regional turmoil is the greatest short-term
risk to the positive outlook for Ericsson stock.
'An extension of the Asian crisis to China would be very detrimental to
Ericsson, since it's their first market in terms of orders received,' said
Douillet at Lehman. China accounts for around 10% of Ericsson's sales and
has overtaken the U.S. as its largest market.
When the company released 1997 results, officials gave no indication of
troubles in Ericsson's Chinese or Japanese markets and said orders received
were strong in the fourth quarter of 1997. However, Ramqvist stressed the
importance of the Chinese market.
But some analysts caution that country risk attached to China must not be
overstated. 'Barring a Chinese devaluation, it really poses no great risk to
Ericsson,' said Kevin Brau at Credit Suisse First Boston in London, which
rates Ericsson stock a 'buy.'
The company is expected to enjoy strong sales growth again in 1998 after
posting a 35% rise to SEK167.74 billion in 1997. But the increase is
expected to be smaller this year, and mobile-telephone handsets are seen
playing a less dramatic role in boosting earnings.
Mobile-telephone sales rocketed 87% in 1997, compared with 23% growth
in Ericsson's biggest business area, mobile systems. Falling prices and a less
favorable product mix for Ericsson are expected to cap growth in mobile
sales this year, but analysts generally anticipate that it will at least match
growth in sales of the company's other products.
Prices for digital handsets were surprisingly stable in 1997, but Ericsson said
they started to decline in the fourth quarter and are likely to continue sliding
in 1998. Mobile-telephone prices typically are seen dropping by around
20% annually.
'Ericsson launched many new phones in 1997, and traditionally the price
pressure comes after a while, so we will see more price pressure in 1998
than in 1997, but Ericsson should still be able to take more market share,'
said FoereningsSparbanken's Ihrefeldt. Nevertheless, he sees Ericsson
raising pretax profit to SEK20.00 billion in 1998 and to SEK23.60 billion in
1999.
Ericsson became the leader in the digital-handset market in 1997, primarily
at the expense of rivals Nokia Oy (Y.NOK) of Finland and Motorola Inc.
(MOT) of the U.S.
Another factor enhancing the outlook for Ericsson stock is the recent
adoption by the European Telecommunications Standards Institute of a new
cellular-telephone technology to succeed the Global System for Mobile
Communications, or GSM, standard used throughout Europe.
The ETSI decided to adapt third-generation cellular technology developed
jointly by Ericsson and Nokia. The proposal it favors is supposedly a
compromise with rival technology backed by Siemens AG (SMAWY) of
Germany, France's Alcatel Alsthom (F.ALA) and Lucent Technologies Inc.
(LU) of the U.S., but the Swedish-Finnish proposal lies at its core, industry
observers say.
'This has some technological significance for Ericsson since they are bound
to some advantage with patents, but the major advantage should be in
marketing, since they are already suppliers of a very large portion of the
existing GSM customers and satisfied customers tend to come back,'
Handelsbanken's Andersson said.
The new technology will dramatically increase the capacity of the existing
GSM network, making possible high-speed Internet-browsing and
videophone capabilities. Nippon Telegraph & Telephone Corp.'s (NTT)
NTT DoCoMo unit is expected to be the first to adopt it around 2001, with
Europe seen following a couple of years later.
'This is definitely a positive thing for Ericsson over the longer term,'
Lehman's Douillet said. |
