Ericsson: fair value upp till 97 kronor

AKTIE: Stark försäljning av 5G-nät runt om i världen under andra kvartalet och ökad försäljning av mjukvara talar för att Ericssons rörelsemarginaler kommer att fortsätta öka, vilket motiverar en höjning av fair value från 91 till 97 kronor (17 juli 2020).

Morningstar Equity Analysts 2020-07-17 | 9:41

Analyst Note |  Jul 17 2020

No-moat Ericsson's 1% year-over-year revenue growth (flat organically) in the second quarter was driven by strong demand for 5G infrastructure build outs, especially in the United States and China, being offset by weakness in other service offerings. Ericsson has inked deals with all the major Chinese telecom providers for 5G equipment, with the goal of gaining scale to lower costs in the long term in order to offset near-term margin pressures in that geography. The company is showcasing strong 5G progress, with 99 commercial agreements alongside having its radio and core equipment live within 54 networks. With an expectation for Ericsson to outpace market projections for radio access network demand in 2020, continued 5G strength in upcoming years, and traction in lowering costs longer term, we raised our fair value estimate to SEK 97 from SEK 91, and view shares as fairly valued.

Ericsson's networking business was the highlight of the quarter, with the segment growing 5% year over year. Network products were up 9% while network services declined by 2%. An inventory write-down for pre-commercial products and aggressive cost requirements in the Chinese market caused adjusted gross and operating margins for networks to dip year over year to 40.2% and 13.2%, respectively (from 41.4% and 15.0%). We expect the networks business to be the highlight of upcoming quarters with ample revenue growth opportunity with global 5G buildouts along with margin expansion as Ericsson benefits from its previous development efforts providing technological leadership and early 5G wins. In our view, ramping up the installation of 5G equipment as certain geographies race to upgrade their wireless infrastructure should give the networks business, and Ericsson as a whole, insulation from prolonged COVID-19 headwinds.

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