JP Morgan Downgrades Ericsson, Sees Low Chance Of 'Upside Surprises'

JP Morgan downgraded Ericsson (ADR) ERIC on Wednesday from Overweight to Neutral as the reasons for the firm’s 2012 upgrade have “essentially played out.”

Analyst Sandeep Deshpande noted that the company’s gross margin has almost reached 38 percent and future upside will be currency driven. “In past peaks, Ericsson has seen gross margin of 39+ percent and we believe that in 2015, due to transactional exposure to the weak SEK, Ericsson gross margin will see further positive impact.”

The analyst thought that depreciation of the SEK will help sales despite an estimated 1 percent decline in global telecom capex. Deshpande believed “that consensus forecast is essentially full with low potential for network sales upgrade despite likely positive SEK impact. Thus though we have no reason to believe there is downside risk at this time, we see much lower chance of upside surprises.”

“Valuation is rarely the only reason to buy or sell a tech stock,” according to Deshpande. However, “Ericsson is trading on 17.7x 12m fwd PE, well above the historical median multiple of 13.8x, and close to their previous peak multiple of 18x.”

After citing historical averages for EV/Sales, EV/EBITDA and EV/EBIT, Deshpande commented that “on average, the stock is already trading at 20+ percent premium to its historical multiples.”

The firm maintained a $14 price target on the stock.

Ericsson recently traded at $12.27, down 2.54 percent.