A Sneak Peek Into Ericsson's (ERIC) Q3 Earnings Report

Telefonaktiebolaget LM Ericsson (ST:ERICAs) (publ) (NASDAQ:ERIC) is set to report third-quarter 2016 results on Oct 21, 2016.

Last quarter, the company had posted a negative earnings surprise of 28.6%. Also, the company has had a choppy earnings history over the trailing four quarters, having missed estimates twice, for an average negative surprise of 9.1%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Last week, as Ericsson released preliminary results, it issued a warning that its third-quarter earnings are likely to be significantly lower than expected, in the face of a steadily weakening mobile broadband business. Its initial numbers show that quarterly sales in its core networks division will plunge nearly 20%.

Overall, sales for the third quarter are expected to be down 14% year over year, with operating profit plummeting 93%. Ericsson mentioned that the drop in sales had been dragged by markets with a weak economic backdrop, specifically Brazil, Russia, and the Middle East. Even in Europe, sales were affected due to the completion of mobile broadband projects last year.

With most mobile-broadband projects having been completed last year, declining demand for 4G networks has resulted in sharply lower spending by mobile service providers, thus directly affecting Ericsson’s top line. Its Wireless Product segment is suffering from soft demand as well. Further, the company has been grappling with stiff competition from Finland’s Nokia (HE:NOKIA) and China’s Huawei, which will likely hurt its results in the upcoming quarter.

Earlier this month, the company announced its intention to lay off 20% of its domestic workforce, in a bid to cut costs as it battles with a downward spiralling demand and cutthroat competition. Ericsson already has a cost-control program in place: however, it stated that its efforts to reduce costs are failing to offset the diminishing sales and contracting margins. These negative trends are expected to thwart Ericsson’s profits in the third quarter.

In the face of stagnating demand for mobile infrastructure in developed markets, Ericsson is preparing to focus on faster growing areas, such as IP and cloud-based communication and services for new industrial customers. The Swedish firm is betting on the development of faster wireless networks – called 5G – as well as software-based systems such as the so-called Internet of Things.

Despite multiple headwinds, Ericsson’s strengths, including leading market share in LTE technology, enhancing foothold in the broadcasting and media industry and ongoing global cost and efficiency programs are anticipated to boost growth. The company constantly seeks to seize business opportunities as operators shift toward 4G deployments and prepare grounds for the forthcoming 5G revolution. Ericsson’s partnership with Cisco Systems (NASDAQ:CSCO) will also help expand its product line up and sell more complete networks.

ERICSSON LM ADR Price, Consensus and EPS Surprise

Earnings Whispers

Our proven model does not conclusively show that Ericsson will beat earnings estimates in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP: Earnings ESP for the stock currently stands at -55.56%. This is because the Most Accurate Estimate of 4 cents is lower than the Zacks Consensus Estimate of 9 cents.

Zacks Rank: Ericsson's Zacks Rank #4 (Sell) further lowers the predictive power of ESP.

Note that we caution investors against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Banco Santander (MC:SAN) (Brasil) S.A. (NYSE:BSBR) is expected to release its quarterly results on Oct 25. The company has an Earnings ESP of +33.33% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Entergy Corporation (NYSE:ETR) has an Earnings ESP of +11.64% and a Zacks Rank #2. The company will report results on Oct 25.

E. I. du Pont de Nemours and Company (NYSE:DD) has an Earnings ESP of +9.52% and a Zacks Rank #3. The company is expected to release earnings results on Oct 25.

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