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Ericsson: Solid Play on 5G

08/06/2019 5:00 am EST

Focus: TELECOM

Eddy Elfenbein

Editor, Growth Stock Advisor

Taking a look at some second-quarter earnings report it appears that the turnaround at Ericsson (ERIC) — is continuing, asserts Eddy Elfenbein, editor of Growth Stock Advisor.

On July 17, Sweden-based Telefonaktiebolaget LM Ericsson reported solid results for its fiscal second quarter. The Swedish telecom giant reported earnings of 0.59 Swedish crowns. That’s a huge turnaround from last year when the company reported a loss of 0.58 Swedish crowns for its second quarter.

Ericsson said that revenues rose 7% to 54.8 billion Swedish crowns. That works out to $5.83 billion which beat expectations of $5.68 billion. Operating profits came in at 3.7 billion crowns which matched expectations.

The key stat I like to watch is gross profit margins. For Q2, that improved by 180 basis points to 36.6%. The problem is that gross margins for their networks division fell 180 basis points to 41.4%. Moreover, the company said that that figure will likely continue to decline.

The problem is that the company needs to win large 5G contracts and they’re competing against big rivals likes Nokia and Huawei. What some investors are missing is that winning these contracts now will help margins in the long run. Ericsson made it clear that they see strong demand for 5G products.

"We see strong momentum in our 5G business with both new contracts and new commercial launches as well as live networks," said CEO Börje Ekholm. "To date, we have provided solutions for almost two-thirds of all commercially launched 5G networks."

"We continue to take strategic contracts and the large-scale network deployments, expected to commence in parts of Asia, will gradually impact margins negatively in the short term but strengthen our position in the long term," he added.

"Continued technology and market investments, especially in 5G, automation and AI, are fundamental for long-term competitiveness and a key part of our focused strategy to strengthen our long-term business and path to reaching our targets for 2020 and 2022."

Some folks had expected Ericsson to raise its forecasts for next year. The company didn’t, but Ericsson said it’s aiming for 10% operating margin in 2020.

Shares of ERIC pulled back after the report, but I think the stock is poised to rally soon. Investors need to see the larger picture here. Ericsson will benefit massively from the world of 5G. This is a solid company.

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