Ericsson Hit By Macro Woes & Elevated Costs: Time To Dump?

Premium networking, telecommunications equipment and services provider, Ericsson (BS:ERICAs)’s (NASDAQ:ERIC) financial troubles over the past few years have been well-documented. The company’s repeated earnings misses, eroding profitability and precipitous revenue decline have left investors high and dry. Most recently, write-downs and restructuring costs have pushed the bottom line deep into the red.

Last month, this Zacks Rank #5 (Strong Sell) company released its first-quarter 2017 results, reporting a huge non-IFRS loss of SEK 2.42 (27 cents) per share that compared unfavorably with the Zacks Consensus Estimate of earnings of 3 cents. The stock has lost 9.8% over the past one year against the Zacks categorized Wireless Equipment industry’s average gain of 7.9%.

Also, the analyst community is showing no favor toward the stock as the Zacks Consensus Estimate for full-year 2017 earnings has gone down from 29 cents to 27 cents, owing to two downward estimate revisions versus none upward. Given its array of problems, we believe Ericsson investors are in for an even bumpier ride. Let’s take a deeper look at factors plaguing the company.

Spending Volatility

Most of Ericsson’s troubles stem from drying-up investments by major telecom equipment makers across the world. These companies continue to slash investments in 4G and 3G services while waiting for the introduction of 5G networks. In addition, slowdown in spending by wireless carriers is making matters worse. Soft mobile broadband demand and slowdown in emerging markets are harrowing the company further. Straight quarters of revenue declines and contract losses in Italy and Russia have marred the company’s top line of late.

Escalating Costs

If grappling with a slowdown is not enough, Ericsson is facing sky-rocketing restructuring expenses as part of its continued efforts to turn around its ailing business. Earlier, the company revealed its plans to re-invest in research and development and simplify its structure.

However, in March, it rolled out a more elaborate version of this restructuring plan in a bid to contain costs and focus on strategic areas. The announcement spooked investors with a huge profit cut as Ericsson said it anticipates substantial provisions, write-downs and restructuring charges relating to these efforts. It has doubled its full-year 2017 restructuring charges guidance from SEK 3 billion to SEK 6–8 billion.

Uncertain Bets

Ericsson is a leading developer of the 5G standards, having successfully tested 5G speed networks. The company believes that standardization of 5G is the cornerstone for digitalization of industries and is investing substantially to capitalize on this trend. Though Ericsson believes that 5G networks deployments will commence by 2020, we are wary about its profitability in the meantime.

This apart, rising competition in the wireless networking equipment market and ongoing industry consolidation makes us believe that Ericsson’s challenging times are here to stay, at least in the foreseeable future. It is hard to tell how much more Ericsson will suffer on the bourse, before the commencement of 5G commercial deployments and material gains from restructuring take form.

Stocks to Consider

Some better-ranked stocks in the broader sector include Cohu, Inc. (NASDAQ:COHU) , Motorola Solutions, Inc. (NYSE:MSI) and NCR Corporation (NYSE:NCR) . While Cohu sports a Zacks Rank #1 (Strong Buy), Motorola Solutions and NCR Corporation hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cohu has a striking earnings surprise history, with an average positive surprise of 121.2% over the trailing four quarters, beating estimates all through.

Motorola has a striking earnings surprise history for the last four quarters, having beaten estimates all through for an impressive average of 16.6%.

NCR also has an excellent earnings surprise history, with an average beat of 11% for the trailing four quarters, beating estimates all through.

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