Bank Of America Lowers Ericsson Two Notches: Recovery 'Longer And More Complicated'

Swedish telecom equipment maker Telefonaktiebolaget LM Ericsson ERIC announced fourth-quarter results in late January, with most main metrics trailing estimates, Bank of America Merrill Lynch said in a Monday morning note.

The Analyst

BofA Merrill Lynch analyst Tal Liani downgraded Ericsson from Buy to Underperform and lowered the price objective for its Swedish Krona-denominated shares.

The Thesis

"Though there are signs of restructuring improvements, the road to recovery is proving longer and more complicated, and the milestones achieved so far are underwhelming," Liani said in a Monday note. 

Despite Ericsson moving halfway through its three major margin drivers — namely cost cuts, contract renegotiations and shifting to a new platform — the analyst said the improvements are relatively benign.

With the company opting to keep its broadcast services business after receiving "inadequate" offers, Liani said the media strategic review is no longer a positive catalyst.

The company may now have to further restructure its "other" segment, which has negative 61 percent operating margin, Liani said.

This potential restructuring, along with a 1-billion-krona drop in IPR revenues, could reduce potential margin upside, the analyst said. 

"In 2018, we expect revenues to decline, operating expenses to flatten, and flag the risk of a potential decline in high-margin IPR revenues." 

The Price Action

Ericsson shares were up about 16 percent over a one-year period until Friday.

Shares were slipping 4.25 percent at the time of publication Monday afternoon. 

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Photo courtesy of Ericsson.