Bernstein's Five 'Simple' Reasons To Own Ericsson Stock

• Ericsson (ADR) ERIC has seen a 23.8 percent decline in its share price, year to date.
• Bernstein’s Pierre Ferragu has maintained an Outperform rating and price target of $14.46 on the company,
• The pullback in the stock, despite Ericsson being unaffected by the situation in China, offers an attractive buying opportunity, according to Ferragu.

According to the Bernstein report, the company has a “solid fundamental story,” which Ferragu has summarized under five key points.

Firstly, Ferragu believes that “Ericsson dominates a stable and consolidated industry.” He also believes that only vendors with scale and with capacity for substantial ongoing R&D spending would be able to sustain profits in the wireless equipment market.

Secondly, “Ericsson is at the beginning of a multi-year structural improvement in gross margins.” According to Ferragu, densification positions a new entrant like the company in the best way, while driving margin expansion.

Thirdly, Ferrgu expects favorable gross margin and revenue trends in 2015, with an improved business mix further driving the gross margin. “A rebound in North American service provider capex spend should see Ericsson reverse its first half fortunes,” the Bernstein report said.

Fourthly, the company’s target of SEK9 billion in cost savings by 2017 is still underappreciated by the market.

Lastly, whether or not long term equipment growth materializes, Ferragu believes that the company has the potential for robust earnings expansion.

“In summary, we see Ericsson as the market leader in Wireless Equipment and should benefit from further consolidation of the industry. As the company suffers from significant profitability headwind, the stock remains attractively valued and outperform as these headwinds abate,” the report added.