Ericsson (ERIC) Q3 Earnings: Another Miss In The Cards?

Ericsson (BS:ERICAs) (NASDAQ:ERIC) is set to report third-quarter 2017 results on Oct 20.

The company has a dreadful earnings history, with repeated, colossal earnings misses. Last quarter, the company missed estimates for the sixth consecutive quarter, recording a huge negative surprise of 60%. Ericsson witnessed an average negative surprise of 288% for the trailing four quarters.

Let's see how things are shaping up for this announcement and whether Ericsson is set to add yet another earnings miss to its losing streak.

Factors to Consider

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). Slowdown in spending by wireless carriers severely hurt the company’s financials in the past few quarters and will likely hurt the third-quarter results as well.

The beleaguered infrastructure giant’s repeated earnings misses, eroding profitability and precipitous revenue decline have left investors high and dry. The stock has lost 6.3% over the past six months, much wider than the industry’s average gain of 3%.

Most of the company’s troubles have stemmed from drying-up investments by major telecom equipment makers across the world. Particularly, uncertainty in the financial markets, reduced consumer telecom spending and delayed auctions of spectrums pose significant threats for Ericsson. The company’s revenues and margins in the Networks and IT & Cloud segments continue to take a grave beating from adverse industry trends, which are expected to reflect in the upcoming results as well.

Further, in the second-quarter 2017 earnings report, Ericsson noted that it expects a “high single-digit percentage” drop in the market for radio access networks this year, which is worse than previously projected. Network equipment sales, particularly in the North America and Europe markets, continue to contract. Europe and Latin America — the markets with the biggest impact — are likely to have an increasingly challenging investment environment in the quarters to come.

Particularly, straight quarters of revenue declines and contract losses in Italy and Russia have made matters worse for Ericsson. This trend is unlikely to reverse itself in the to-be-reported quarter, thus thwarting profitability and sales.

Ericsson Price, Consensus and EPS Surprise

Ericsson Price, Consensus and EPS Surprise | Ericsson Quote

Soft mobile broadband demand and slowdown in emerging markets will continue to put a significant dent in Ericsson’s performance. These factors will likely manifest in the company’s sales in the to-be-reported quarter. In fact, it expects the industry trends and business mix in mobile broadband to prevail this year as well.

To turn its fortunes, Ericsson came up with an elaborate restructuring plan to cut costs and focus on strategic areas.

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 November 2015, is winning Ericsson lucrative awards, which should positively impact the upcoming quarterly results.

We believe the only potential upside to earnings in the near future depends mostly on expense management. Ericsson had earlier announced a restructuring plan to cut costs and streamline the company’s focus areas, as well as explore options for the media business.

Earnings Whispers

Our proven model does not conclusively show that Ericsson will beat on 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 at least 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP for the company is currently pegged at -260.00%. This is because the Most Accurate estimate stands at a loss of 2 cents, while the Zacks Consensus Estimate is pegged at earnings of 1 penny.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Ericsson has a Zacks Rank #5 (Strong 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:

Terex Corporation (NYSE:TEX) , with an Earnings ESP of +5.04% and a Zacks Rank #2, is expected to release quarterly numbers around Oct 30. You can see the complete list of today’s Zacks #1 Rank stocks here.

Scorpio Bulkers Inc. (NYSE:SALT) , with an Earnings ESP of +13.24% and a Zacks Rank #2, is slated to report results on Oct 30.

Rockwell Collins, Inc. (NYSE:COL) , with an Earnings ESP of +6.79% and a Zacks Rank #3, is expected to report quarterly figures around Oct 27.

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