Ericsson: Lowered Revenue And Earnings Outlook

LM Ericsson Telephone Company (ERIC) reported slightly lower revenues but lower than expected earnings for 2Q08. We continue to rate shares of ERIC a Hold.

Ericsson’s shares have fallen 5.34% since our last report, reflecting the current crisis in world markets. While the company expects results in 2008 to be flattish, we remain concerned that this was not a one-off delay in orders but a larger trend of more-competitive pricing by the equipment vendors as new deals become harder to win, and delays are causing large disruptions in earnings to most major players in the marketplace.

Based on these issues, we are lowering our revenue and earnings outlook of the company for 2008, and while the shares are trading mostly at the same level than a month ago, we believe it will take management a long time to gain back the trust it lost with the financial community. Additionally, the premium to its peers that the company used to command has now gone to Nokia and we believe shares are fairly-valued at its current levels, which are now closer aligned with its peers.

Our new price target of $10.75 is based on the company selling at 13.78x our 2008 earnings estimate, which equates to a forward EV/2008E Sales multiple of 0.656x, 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 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. The Board has retained the same dividend payment for FY07 as for the prior year FY06.

Udayan Mukherjee contributed to the report.

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