Ericsson Divests Power Module Unit as Part of Restructuring

Telefonaktiebolaget LM Ericsson (publ) ERIC recently announced that it has inked an agreement with Singapore-based power-supply products provider, Flex, to divest its Ericsson Power Modules EPM business. The transaction, subject to customary closing conditions and regulatory approvals, is scheduled to close in third-quarter 2017.

The deal marks the first exit of assets initiated by the company under its elaborate restructuring plan. Introduced in March, the main objective of the plan is to focus on selective core areas. In addition, a recent article in Bloomberg reported that the company is most likely hiring major banks to explore options for the divesture of its media business. These include Goldman Sachs Group, Inc. GS and Morgan Stanley MS.

EPM manufactures power supply products for information and communications equipment, additional computing and industrial applications. Per the agreement, Ericsson's EPM business, excluding the brand, will be integrated with Flex. In particular, the company's manufacturing site in China, the Shanghai Ericsson Electronics Corporation Ltd and certain business assets in Sweden will be sold to Flex.

Flex offers engineering, manufacturing, real-time supply chain insight and logistics services across a gamut of industries. It believes that absorption of Ericsson's EPM business will enhance its "Sketch-to-Scale" portfolio and allow it to expand footprint in the cloud and telco data center markets. As a part of this deal, more than 300 of Ericsson's employees and consultants are likely to join Flex.

Ericsson's 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. The stock has lost 11.2% over the past one year against the Zacks categorized Wireless Equipment industry's average gain of 6.4%.

The company has rolled out a major restructuring plan in a bid to contain costs and focus on networks, digital services and Internet of Things (IoT). The announcement spooked investors, as Ericsson warned huge profit cuts during the process, led by substantial provisions, write-downs and restructuring charges. The company has doubled its full-year 2017 restructuring charges guidance from SEK 3 billion to SEK 6–8 billion.

During first-quarter 2017 results, write-downs and restructuring costs pushed the bottom line deep into the red. Moreover, the Zacks Rank #5 (Strong Sell) company has to contend itself with sluggish 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. It is hard to tell how much more Ericsson will suffer on the bourse, before the material gains from restructuring take form.

The analyst community is showing no favor toward the company either. The Zacks Consensus Estimate for full-year 2017 earnings continues to go south. Two downward estimate revisions have led the same to go down from 29 cents to 27 cents over the past couple of months.

A better-ranked stock in the industry is Ubiquiti Networks, Inc. UBNT. The company has a solid earnings surprise history for the trailing four quarters, having beaten estimates thrice for an average beat of 13.3%.You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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