Hold Ericsson At Current Levels

LM Ericsson Telephone Company (ERIC) experienced operator consolidation and delays in mobile telecom roll-outs across Europe and Asia. Political uncertainty played havoc as well, which caused its product mix to be more-heavily weighted towards lower-margined products and services. This, in turn, reduced the company’s overall margins and earnings significantly during the first quarter.

Although the company’s share price has stayed flat after a severe correction, we remain concerned about the near-term outlook for the industry as a whole as competition continues to drive pricing lower. We continue to rate shares of ERIC a Hold.

Ericsson’s shares have held steady since our last report despite to the current crisis in world markets. The acquisition of HyC group strengthens Ericsson’s position in the services and multimedia domains as a systems integrator of IPTV solutions and it enhances the capabilities of the company.

Our new price target of $11.25 is based on the company selling at 10.04x our 2008 earnings estimate, which equates to a forward EV/2008E Sales multiple of 0.72x, slightly higher than the industry average but more in line with the company as it has a low debt balance and a large cash position. The Board has retained the same dividend payment for FY07 as for the prior year FY06.

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