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Telefonaktiebolaget LM Ericsson: Cautiously Bullish


  • Telefonaktiebolaget LM Ericsson has been weighed down by a below-investment-grade rating of its long-term debt and a $1.2 billion penalty that it settled with the U.S. Justice Department.
  • The company generates robust cash flows quarter over quarter and has successfully repaid a significant chunk of its long-term debt in the last 6 months.
  • It has also started eating into Huawei’s business, and I’m cautiously bullish on the stock.
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Remember, 2000 was the year of the dot-com bust. The telecom industry lost about $2 trillion in market capital at that time. - Mo Ibrahim

Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) reported a $326.28 million drop in revenues for the last quarter, but its EPS kept up with estimates. A decline in sales for Digital Services was responsible for the revenue miss. Plus, COVID-19 skewed the timing of contracts. The company also expects Q2 2020 to be softer.

Despite this, I am cautiously bullish on the stock and recommend it as a buy on dips or in an SIP. Here are the reasons why:

Market Penetration


Image Source: ERIC Presentation

Sixty-one percent of ERIC’s sales are from Europe, Latin America, and North America. The rest are from SE Asia, NE Asia, and ME/Africa nations. Revenues grew in Europe but were set off by a decline in Latin America (refer image above). SE Asia and China revenues dived (decline in 4G) while Japan (North-East Asia region) revenues increased.

What’s great to learn is that sales jumped in North America, Europe and Latin America, which together contribute 61% to the revenues. North America, Middle East and Africa witnessed robust 4G and 5G momentum.

With 5G around the corner, ERIC looks well poised in the post-COVID-19 age.

Robust Cash Flows


Image Source: Seeking Alpha

ERIC has reported healthy cash flows in Q1 2020, but it expects a soft Q2 2020. Its business should pick up thereafter per the company’s estimates. For Q1 2020, ERIC reported operating cash flows of $434.8 million. The company has been reducing debt quarter over quarter (you’ll read the reasons downstairs). In the last five quarters, ERIC has repaid $853 million debt, thereby bringing its long-term debt to $2.36 billion as of March 2020 from $3.78 billion as of Sept 2019.

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This article was written by

Michael A. Gayed, CFA profile picture
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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