Ericsson Enters What Is Typically Its Strongest Quarter Under A Cloud Of Uncertainty

Shares of Telefonaktiebolaget LM Ericsson ERIC plummeted more than 20 percent after the company issued a Q3 profit warning. The challenging trends being faced by Ericsson could continue in the near term and extend into Q4, Argus’ Jim Kelleher said in a report. He maintained a Hold rating on Ericsson, recommending against buying the stock on weakness.

Profit Warning

Ericsson projected a 14 percent y/y decline in its Q3 revenues, citing a 19 percent decline in network revenues. The company guided to a 600bps contraction in gross margin to the 28 percent range. Operating income is expected to decline more than 94 percent to around SEK 300 million.

Heading Into Q4

Ericsson further warned that the current trends could continue in the near term. Analyst Kelleher commented that these trends could impact Ericsson’s performance in Q4, which has been the company’s seasonally strongest quarter.

Valuation

Although Ericsson’s shares are down 42 percent in 2016, “we are not inclined to chase the stock on weakness,” Kelleher mentioned, citing “the uncertain timeline for investment.” He explained that the Hold rating was justified by the company’s “widespread regional weakness, challenging top-line trends, and the uncertain outlook.”

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