Goldman Slaps A Sell Rating On Ericsson

Goldman Sachs downgraded Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC) to Sell from Neutral after cost-cutting announcements and challenging industry conditions — the strong U.S. dollar will weigh on purchasing power in some emerging markets.

Analyst Commentary

“[W]e see a drag on gross margins from the rising proportion of Services in the mix. Given ERIC lacks fixed-line exposure, we see mid-term share loss risks vs converged peers with increasing R&D budgets (ahead of the 5G transition),” analyst Alexander Duval wrote in a note.

Duval said his fourth-quarter EBIT estimate for Ericsson is 30 percent below consensus, as he expects quarter-over-quarter revenue growth of 14 percent versus the five-year average of 21 percent given emerging market weakness and a low contribution from managed services.

Further, Goldman’s analysis of global wireless capex point to a decline in capex of 3 percent in 2017. Duval expects wireless capex in China/Europe, which accounts for about 40 percent of global wireless capex, to decline 13 percent/5 percent this year.

As such, the analyst cut 2017–20 EBITDA estimates between 6 percent and 12 percent due to lower gross margin estimates on the dilutive effect of services mix.

“In this context, we see a risk of a further numbers reset, alongside scope for the dividend to be reduced (in light of our lower cash generation forecasts),” Duval added.

At last check, ADRs of Ericsson had fallen 2.20 percent to $5.78 on the day.

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