Citi Upgrades Ericsson To Buy, Notes 'Likely Resurgence' In Wireless Spending

In a report published Thursday, Citi analyst Ehud Gelblum upgraded the rating on Ericsson ERIC from Neutral to Buy, while maintaining the price target at SKr115. The upgrade reflects the "likely resurgence in wireless spending" and a number of options available for operating margin expansion.

"Following a weak Q1’15, due to depressed wireless capex in North America, the stock sold off hard, creating what we believe could prove to be a compelling entry point," Gelblum said.

In the report Citi noted, "We believe the critical North America market is likely to start showing signs of life in the second half of the year, after remaining moribund for the past six quarters. We believe the recovery extends beyond H2 and continues into 2016 as operators are likely to deploy new equipment post the AWS-3 spectrum auction."

Among the paths available to the company to achieve op margin expansion, Gelblum highlighted the following:

1. Cost cutting measures
2. A more stable competitive environment following the merger of Nokia Corporation NOK and Alcatel Lucent SA ALU

"In particular, the lower cost base and the likely pick-up in the topline should lead to operating leverage. We are modeling op margin expanding by 2 points in 2015 to 10%, and by another 2 points in 2016 to 12%, returning to its 2010 high, without any benefits from the NOK-ALU deal," Gelblum wrote.

The report mentioned two drivers for acceleration in revenue growth:

• The merger between Nokia and Alcatel-Lucent would leave only two players in the critical North America market. This could result in market share gains for Ericsson.
• A resolution in the Apple Inc AAPL IPR could boost margins.