On December 16th, Evercore Partners initiated coverage on Ericsson, at Equal Weight, with an $11 price target. According to the report's authors, "[w]e view ERIC as a modest-growth cyclical play on increased's port wireless network traffic." In addition, the report observed that "[w]e view ERIC's margin profile and valuation as early cycle /depressed but look for expansion through the cycle, as spending shifts from low-margin coverage to high-margin capacity and 4G patterns shift from the US to the rest of the world….[and we] expect the 4G spend, which is well underway in the US, to spread to international markets in the coming years in the form of both coverage and/or capacity upgrades to 'modernized' networks."
Notwithstanding, the authors surmised, "[w]e see ERIC's ~5% networks margins as depressed versus a more normalized 12-18% range, in part due to its "modernization" program in Europe." Moreover, the report continued, "[w]e estimate ~$1B in royalty revenues for ERIC from handsets and infrastructure, based on 30,000 patents….[and we] are encouraged by ERIC's efforts to monetize its patents and will closely watch its Samsung case for a shift towards a volume based IP revenue model and potential upside to our forecasts."
With respect to small-cell related observations, the report notes, "Small cells a "wild card" which could take some "oomph" out of the capacity phase, but ERIC has incumbent advantage." This is because, "[w]e see small cells as a possible threat to ERIC who, as the leading macro-cell player, only has share to lose should the promise of openness play out in small cells, but also faces a potentially challenging margin structure for small cells versus its channel card/ software capacity upgrade model.
On a positive note, however, the authors continued, that "we are encouraged by ERIC's purchase of carrier WiFi-play Belair networks who along with CSCO and RKUS are the three leading carrier WiFi providers….[and we] see the "het net" or heterogeneous network of the future comprised of all different sizes, shapes and configurations, from the 50W 4G macro cell to the 50mW 4G/Wi-Fi femto cell, with a myriad of products in between." Therefore, the authors continued, "[w]e believe this complexity should benefit a full systems supplier such as ERIC in the coming cycle.