A 'More Aggressive Approach': Ericsson Notches Upgrade After Q1 Print

Telefonaktiebolaget LM Ericsson ERIC reported first-quarter results Friday that turned Charter Equity bullish on the stock.

The Analyst

Charter Equity Research's Edward Snyder upgraded Ericsson's stock rating from Market Perform to Buy.

The Thesis

Ericsson reported a beat on the earnings line, but revenue fell short of expectations and dropped 24.1 percent from the prior quarter, Snyder said in the upgrade note.

The revenue miss could be attributed to typical seasonality factors and a "steep decline" in Chinese sales along with an unfavorable foreign exchange. Yet Ericsson's gross margin was "significantly higher" across multiple business lines and total gross margin rose 359 basis points from the prior quarter to 35.9 percent, according to Charter.

The company's earnings report shows management's dedication toward taking a "more realistic view" of its prospects coupled with a "more aggressive approach" to improving operations, Snyder said. "Materially better efficiency" offset what would have otherwise been a down quarter, he said. While it is difficult to project whether this momentum will continue, Ericsson's management "gave every indication" that margin improvements are due to lower costs and better performance rather than a more favorable mix or contract timing, the analyst said.

The Swedish telecom company reiterated a cautious stance for its prospects of revenue recovery, and Ericsson's near-term outlook looks better now than it did ahead of the earnings print, Snyder said.