Ericsson (ERIC) Q1 Earnings: Stock To Disappoint Again?

Telefonaktiebolaget LM Ericsson (BS:ERICAs) (publ) (NASDAQ:ERIC) is set to report first-quarter 2017 results on Apr 25.

Last quarter, the company posted the fourth consecutive earnings miss, recording a negative surprise of 36.4%. Consequently, it has an average negative surprise of 35.9% for the trailing four quarters.

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

Factors Influencing this Quarter

Ericsson is in the midst of its worst crisis in a decade, grappling with shrinking markets and stiff competition from China's Huawei and Finland's Nokia (HE:NOKIA). The company, like most other telecom equipment makers across the world, is distressed as customers are investing less and less in 4G and 3G services, while waiting for the introduction of 5G networks. Slowdown in spending by wireless carriers severely hurt the company’s financials in the past few quarters and is likely to hurt first-quarter results as well.

Especially, straight quarters of revenue declines and contract losses in Italy and Russia made matters worse for Ericsson. This trend is unlikely to reverse itself in the to-be-reported quarter, thus hurting profitability and sales. To turn its fortunes, Ericsson came up with an elaborate restructuring plan to cut costs and focus on strategic areas. The company warned investors that most of the write downs and restructuring charges are booked in the first quarter of 2017, which implies weaker profits.

It expects write downs to hurt operating income by as much as SEK 4 billion ($456 million) in first-quarter 2017. Further, with a strong focus on cost cutting, it expects to book about SEK 2 billion of restructuring charges in the quarter to be reported. Provisions of around SEK 7 billion–SEK 9 billion ($797 million–$1.02 billion) would also be made in the first quarter, related to negative developments in certain large customer projects. Such actions are expected to inflate operating expenses for the soon-to-be-reported quarter.

Despite these challenges, Ericsson is the world’s largest supplier of LTE technology with a significant market share and has established a large number of LTE networks worldwide. Also, the Ericsson-Cisco partnership, which has been shaping up well ever since its inception in Nov 2015, is winning Ericsson lucrative awards, thus boosting growth. During the first quarter, the company won some lucrative deals from Verizon Enterprise Solutions, Vodafone (LON:VOD) Egypt and Batelco.

Moreover, the company partnered with Tanzanian mobile network operator, Tigo, to launch active 3G sites in GSMA and Panasonic Corporation, and bring a new energy-as-a-service (EaaS) solution to market. In terms of geography, Southeast Asia and Oceania are expected to emerge as strong profit churners. Robust 4G deployments in Indonesia, Thailand and China are expected to boost the top-line growth in first-quarter 2017. This apart, Ericsson’s “cost and efficiency program” is anticipated to reduce annual run rate of operating expenses and generate substantial savings, to offset some of the challenges plaguing the company.

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. But that is not the case here as you will see below.

Zacks ESP: The Earnings ESP for the company is currently pegged at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 3 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Ericsson carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing 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:

Avid Technology, Inc. (NASDAQ:AVID) has an Earnings ESP of +160.00% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate Technology plc (NASDAQ:STX) has an Earnings ESP of +3.77% and carries a Zacks Rank #2.

Littelfuse, Inc. (NASDAQ:LFUS) has an Earnings ESP of +1.83% and carries a Zacks Rank #2.

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