[updated below] Shares of Ericsson (ERIC) are down another 5%-6% Wednesday morning after Goldman Sachs removed them from their Conviction Buy List. This comes after the stock got hit 12% Tuesday on cautious guidance comments from the company's management, saying Q4 results will likely come around the low end of current guidance.
- Banc of America is among the few firms out with defensive comments, saying that despite another disappointing data point, they believe ERIC is attractively valued at these levels. With a very strong Services business and a dominant share in wireless infrastructure, they see scope for improvement. Firm also expects better cash conversion over the next several quarters, which could restore management credibility.
Continued slowdown in U.S., Telefonica's (TEF) acquisition of TIM, and possible network sharing agreements in the UK were all cited as reasons for revenues being light in Q4. While none are new items and the Q4 should be weak for the industry, the firm expects some normalization in 1H08.
Notablecalls: I think ERIC may be a bounce candidate around the $24 level as the weak guidance has already been baked in the valuation here. Note that RBC Capital was out on ERIC just a couple of days ago, taking their Q4 revenue estimates to low end of management guidance range, noting Ericsson is seeding the opportunities for future growth in new markets which may have some negative near term margin impact. According to RBC, it may take a few more quarters for Ericsson's financial model to reach steady state.
So no real surprise here. With the stock knocked down by GSCO downgrade Wednesday morning, I think there's a fair chance the stock may stage a bounce here.
[Update]Tero Kuittinen from Avian Securities believes that Svanberg is indeed on the way out after the investor relations fiasco involving Ericsson's seemingly evolving story lines from September, October and now November. The investor, the biggest owner of Ericsson, has already announced that it still backs Svanberg, but in the most cursory manner.
Obviously, Ericsson is now heading towards value territory - but it's just as clear that the market no longer believes that the operating margin slide will halt at the 13-15% level. Investors have started pricing in the global mobile CAPEX spending decline in early 2008 - the scenario Avian has been discussing throughout the summer and autumn.
Nevertheless, Ericsson has several things going for it:
First - some of its market share gains may have come from lowballing orders in India and China, but they are likely to stick. Ericsson may well head into the next CAPEX upswing with 45%-plus global infra share.
Second - Ericsson's margins may well dip into single digits, but it now has a new multimedia business line that might actually thrive in recession conditions. Operators may opt to begin outsourcing more of their billing and content design/operation if they decide to cut costs in a recession environment. Ericsson is far ahead of its smaller rivals in this category of offering advanced outsourcing services to mobile carriers.
Third - the massive China 3G orders loom in the horizon, probably 2Q or 3Q 2009 in our conservative estimate. That's still 6-7 quarters out - but it's a concrete and sizeable new revenue cake from which Ericsson has a reasonable chance of carving a 30-40% slice even with the likely domestic vendor quotas.
The firm thinks Ericsson may become one of the first major telecom stocks to bottom out - though most likely much grief and panic lies ahead as the sector comes to grips with a true cyclical downturn. It is well worth considering as a prime candidate for a robust rebound if the stock tumbles again Wednesday on the back of a global sell-off wave. They think the resignation of Svanberg might perk up considerable interest from investors - the CEO's credibility is more or less gone after the curious tonal shifts between the three major investor meetings of September, October and November.
ERIC 1-yr chart: