Will Ericsson Be the Next Nokia?

09/26/2007 12:00 am EST

Focus:

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says the Swedish telecom giant may follow in the footsteps of its Finnish cousin, which has been a top performer this year.

Last year I recommended a company that was facing a lot of skepticism from analysts, but was a leading player in its industry and had especially strong international operations. It also had a compelling valuation and one of its biggest competitors was plagued with major problems.

The company was Nokia (NYSE: NOK), and it was also featured in December as my top pick for 2007. Since the start of the year, Nokia shares have risen 67%.

I bring this up because I am seeing an almost identical situation unfolding with another stock. I know it’s only September, but I already have a pretty good idea of what my favorite pick for 2008 will be. Once again, I’m going back to Scandinavia and back to the telecom sector with Sweden’s Ericsson (NASDAQ: ERIC). But there are many more similarities than geography and industry affiliation. Let’s take a look at some of the things I said about Nokia last year and compare them to Ericsson’s situation today.

Ericsson, just like Nokia, has a dominant position globally and is especially strong in markets such as China and India. [And] like Nokia, Ericsson will continue to benefit from booming global growth in mobile phone usage.

Nokia’s big competitor, Motorola (NYSE: MOT), has had trouble coming up with a worthy replacement to its one-hit wonder Razr phone and activist investor Carl Icahn has been banging on the company’s door.

In Ericsson’s case, the role of the struggling competitor is played by Alcatel-Lucent (NYSE: ALU), which just can’t seem to get out of its own way. It just issued its third profit warning this year and the stock tanked nearly 10% in one session. Meanwhile, Ericsson has been raising its outlook.

[Ericsson’s shares] surged more than 5% on September 11 after chief executive Carl-Henric Svanberg made an upbeat presentation to analysts in London. Ericsson predicted strong growth in the third quarter and beyond as global demand for mobile broadband communications continues to grow rapidly.

Even if you think my thesis about the Nokia-Ericsson similarity is a bunch of hooey, the valuation argument stands alone as reason enough to check out Ericsson shares.

At a recent $39, ERIC is trading for [less than] 14x consensus earnings forecasts of $2.89
per ADR next year and pays a 2% dividend yield. That’s just too cheap for this sort of opportunity. It is debt free and consistently generates a healthy 20%-plus return on equity.

To be sure, these are no longer the hot growth names that they once were back in the 1990s bubble. But it would be foolish to write them off completely just yet, especially at these valuations.

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