Ericsson‘s (NYSE:ERIC) earnings, announced Jan. 25, missed by a country mile.
Analyst Neil Campling of Aviate Global LLP characterized them as “spectacularly dreadful, even with low expectations.” Ericsson’s stock fell 15% that day.
Part of the problem, according to Campling, is that Ericsson doesn’t provide guidance. The analyst estimate for Q4 net income was $641 million. It came in at $227 million — not even close. However, if you exclude restructuring charges, as they were in the 2010 results, the company’s, earnings while much lower, are still profitable — and that’s the name of the game.
Anyone who bought below $9 got a deal. At $10 or slightly below, Ericsson’s still a good bet. More than anything else, this shows how little analysts actually know. If they did know something, the estimates wouldn’t have been so ridiculously high. Ignore the naysayers and take Ericsson’s call. At these prices, you won’t regret it.
Ericsson’s research shows that smartphone users spend 76% of their time on activities other than voice. Five years ago, that number was just 20%.
Consumers require more data, and telecoms want to provide it, but at a price that allows them to make a profit. As a result of the uncertainty surrounding telecom spending, Ericsson, the world’s largest maker of wireless-networking equipment, is trying to cope with the short-term lull by getting deeply involved in the rapidly evolving business of m-commerce, which some estimate will be as much as an $800 billion business by 2016.
At the Mobile World Congress, Ericsson announced a strategic alliance with Western Union (NYSE:WU), the world leader in money transfers. Western Union has been providing mobile money transfers for four years now, and the agreement allows WU to gain access to mobile network operators through Ericsson’s suite of m-commerce solutions. Together, the two companies seek to bring mobile financial services to as many people as possible around the world.
Some 1.7 billion people have access to a mobile phone but have no bank account, so the mobile “wallet” makes an incredible amount of sense. Currently, Ericsson’s billing and charging systems serve 1.6 billion subscribers worldwide in some capacity. So the company will play an important role in the evolution of mobile commerce. It’s a big-picture thing that’s hard to quantify at present.
In 2011, mobile broadband subscriptions hit the 1 billion mark. By 2016, that number could be five times higher as people’s use of smartphones and tablets continues to grow. Operators are looking for the most capacity at the lowest cost per megabyte.
On that front, technology is shifting from CDMA to LTE in order to provide the best user experience possible, and Ericsson is the definite leader in this area. LTE allows the operator to utilize flexible radio spectrum to deliver very high peak rates. Performance in the coming years is going to be critical for mobile broadband to continue to grow.
In 2011, Ericsson’s market share for mobile network infrastructure grew 600 basis points, to 38%, retaking a great deal of business in Europe. As a result, its gross margin dropped to 30.2% from 36.6% a year earlier. That won’t always be the case. As for LTE market share, that’s a question mark. However, CEO Hans Vestberg did say at the Mobile World conference that 300 million customers have access to LTE at the moment and Ericsson’s equipment covers 250 million of those customers, or 83%. As mobile broadband goes, so goes Ericsson.
While fourth-quarter earnings weren’t a thing of beauty, Ericsson managed to deliver enough profit to consider the year a success despite a 65% drop in operating income in the fourth quarter. In 2011, the company grew sales by 12%, to $34.3 billion, with a 9% increase in operating income, to $2.7 billion. Operating margins dropped by a mere 20 basis points year-over-year, so shareholders shouldn’t be too despondent.
Furthermore, return on capital employed in 2011 was 11% — 100 basis points higher than in 2010. The only bitter pill was free cash flow dropping 78% year-over-year, to $756 million. As a result, Ericsson paid out more in dividends than it generated in free cash flow, which hasn’t happened since 2002.
Although 2012 is expected to be another tough year, I have to believe there will be a slight improvement over 2011. At the end of the day, Ericsson’s growth in Asia and elsewhere will continue to power its business.
Eventually, spending will pick up. In the meantime, I like what the company’s doing in m-commerce. With an earnings yield of 7.3%, a cash return of 9.3% and an enterprise value five times EBITDA, you’d be crazy not to buy at under $10.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
