Ericsson Stock Looks Poised to Climb Further

With the 5G revolution continuing and one of Ericsson’s (NASDAQ:ERIC) major rivals badly wounded by President Donald Trump, now is a good time to buy ERIC stock.

ERIC Stock: Ericsson Looks Poised to Climb Further
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Additionally, Ericsson is the world’s leader when it comes to providing 5G infrastructure, and the shares’ valuation is quite reasonable.

The 5G Revolution and a Rival’s Problems

Last month, Barron’s noted that the 5G rollout was continuing despite the novel coronavirus crisis. Moreover, the well-respected publication identified “network infrastructure {companies that} will supply the next-generation antennas and base stations that power 5G networks” as “the best way to play the 5G rush.”

Not surprisingly, Ericsson was included as one of the relevant network infrastructure companies. Raymond James analyst Simon Leopold told Barron’s that Ericsson has better 5G technology than its Finnish rival, Nokia (NYSE:NOK), while Ericsson’s execution is also superior to that of Nokia. The analyst did, however, say that Nokia could be gaining ground on Ericsson on the technology front.

But as I noted in my previous column on Nokia, Ericsson had obtained 81 deals by the end of February to provide 5G infrastructure, versus Nokia’s 67 deals and Huawei’s 91 agreements.

And, as I also reported, Huawei has run into a major problem. That is, Trump in May had prohibited “sales of computer chips made anywhere in the world with U.S. equipment” to the Chinese tech company, according to The Asia Times. And as I stated in the Nokia column, I don’t think many carriers that are spending a great deal of money to build 5G networks will use Huawei if it has to rely on “unproven technologies.”

As the second-leading 5G infrastructure provider through February and given its technology edge over Nokia, Ericsson is very well-positioned to benefit from Huawei’s issues.

Ericsson is poised to win a high percentage of 5G deals outside of China. But the company is also doing very well in China. Specifically, the company says that it had obtained 5G deals “with all three major” carriers in the country.

Further, Ericsson’s windfall from the 5G buildout should last for years. As another InvestorPlace columnist, Tom Taulli, noted in May, “According {to}, spending {on 5G networks} is forecasted to go from $12.6 billion in 2020 to $44.9 billion by 2025, for a compound annual growth rate of nearly 29%.”

If Trump gets re-elected, Ericsson will likely be able to go after the rapidly growing 5G infrastructure market while its top rival has one hand tied behind its back.

More Potential Help From D.C.

Speaking of Trump, the president is reportedly considering proposing a “nearly” $1 trillion infrastructure-stimulus plan that would include allocations for 5G upgrades. According to Fortune, the plan “would reserve most of the money for traditional infrastructure work, like roads and bridges, but would also set aside funds for 5G wireless ‘infrastructure and rural broadband.”

The “America First” administration would try to direct most of the money in the plan to American companies. But of course, the administration doesn’t control the appropriations process; Congress, which is much less “America First”-oriented does.

Moreover, none of the top three 5G infrastructure companies is American, and of course, the administration will refuse to use Huawei for the upgrades. And Ericsson and Nokia are both based in nations that are friendly with the U.S. I think there’s a good chance that, if an infrastructure bill that subsidizes 5G upgrades is passed, Nokia and Ericsson will get pieces of the action.

Still, rumors of an infrastructure bill have swirled in Washington since Trump won the 2016 election, but Congress hasn’t come close to passing such legislation. On the other hand, if the administration pushes a stimulus bill hard, it may be hard for Congress to turn it down now, given the current high levels of unemployment.

I think there’s only about a 20% chance of Congress passing an infrastructure bill that funds 5G upgrades before the election. Still, the possibility of such a bill passing could help Ericsson’s stock.

The Bottom Line on ERIC Stock

In the first quarter, Ericsson’s operating income, excluding certain items, jumped 30% year over year. The stock’s forward price-earnings ratio, based on analysts’ 2020 average earnings per share estimate, is 19.

Given the company’s strong growth outlook, that’s a very low price to pay for ERIC stock. As a result, I recommend that medium-term and long-term investors buy the shares.

As of this writing, Larry Ramer did not own shares of any of the aforementioned securities. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.

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