The Ericsson Set
Bull Argument
By
Joe Masters
Frankly, it isn't easy being bullish on Ericsson <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %> these days. With the stock down some 50% from its all-time high of $26.31 per share achieved back in early March of this year, it is very understandable how one can be discouraged with this company. However, this performance -- or lack thereof -- has not been uncharacteristic of many other stocks in the telecommunications sector this year.
Look at some of Ericsson's competitors. Nokia's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK)") else Response.Write("(NYSE: NOK)") end if %> stock price slid by some 50% also, before a partial post-earnings recovery. Motorola's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> stock is down more than 60% since early March. The entire sector really has been decimated.
All of this is due to concerns that growth in wireless infrastructure equipment and handset sales may be slowing. Indeed, this might be the case, in the short term, especially during this period of competing global "standards" and while the transition to new-generation products takes place. However, the myopic view taken by many could also be the foundation for a market-whomping rate of return on Ericsson stock in the future.
Let's stop a moment here and journey over to Ericsson's website. Go ahead. I'll wait for you.
One of the first things you might notice -- at least I did -- was the scroll box on the left side of the page with the heading "Ericsson around the world." These folks are everywhere. Go and click on a few countries in the list. It really is astounding what a global presence this company exhibits. Now, in the center of the page, look at all the products this company manufactures and all the wireless platforms it supports. Click around. Learn about "Bluetooth," if you haven't already.
The heading in the center of the page says it all to me: "The Power of Mobility." Even in the face of concerns over RF-related brain tumors, higher incidents of distraction-related automobile accidents, and the improprieties of mobile phone usage in certain venues, the wireless revolution continues. Why? Simply because the efficiencies created by continuous access to voice and data transmission does, and will continue to, increase productivity and make life easier. Look to the future. Ericsson predicts that, by 2004, there will be as many as 600 million users of mobile Internet services. This means that more people will use mobile Internet than fixed Internet. Wireless, succinctly put, will pervade. Ericsson will be there.
So, Ericsson is a lock, huh? No. Just because a company has a good product and is in a good market segment, ensures neither financial success nor investment profitability. In fact, in its quarterly reports, Ericsson has publicly stated dissatisfaction with its own performance of late. While the world-recognized leader in wireless infrastructure equipment has increased sales by 34%, orders by 37%, and generated $2.34 billion of operating income with an operating margin of 18% in this segment during the first nine months of 2000, its consumer products area has faltered.
While sales of handsets and other consumer-oriented products grew by 43% during this same period, Ericsson actually lost $583 million of operating income in this segment. Whether the company can turn this division around is a matter subject to speculation. Ericsson does admit the problem, which is part of the road toward recovery, and appears to have a viable strategy in my opinion. However, this probably won't be a quick turnaround for Ericsson. If there is a bright side here, it is that this segment accounts for only around 20% of the company's total sales volume of $18.9 billion, for the first nine months of this year.
Even with the disappointments experienced in the handset market, Ericsson has accelerated top-line growth during the past year. Year-over-year revenue growth for the past four quarters, earliest to most recent, was 25%, 42%, 28%, and 37%. Compare this to the previous four quarters' worth of year-over-year revenue growth of 7%, 8%, 16%, and 14%, earliest to most recent. Net margins have averaged near 7.5%, which is about 50% higher than the average net margin of the previous four quarters.
The company has generated a positive cash flow from operations in six of the past 10 quarters, to the tune of more than $1 billion dollars. Adjusting for stock splits, using U.S. GAAP accounting methods and neglecting unusual items, Ericsson earned $0.26 per diluted share over the past year. In the prior four quarters, the company earned only $0.16 on that same basis. A 60% rise in EPS with a flagging consumer products division?
I believe people focus too strongly on Ericsson as a handset manufacturer, and that this misplaced emphasis has driven down the company's valuation beyond reason. Read about 3G. See who's in the lead. If Ericsson can capitalize on the handset market, then all the better. Even without this, though, Ericsson seems poised for success in the rapidly expanding area of wireless infrastructure equipment, as this truly is its forte.
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