We maintain our long-term Neutral recommendation on
), a network solutions provider, primarily engaged in manufacturing
and selling wireless infrastructure equipment. The company's
leading market share and diversified portfolio have allowed it to
retain a formidable position in the telecom industry.
However, due to the annual decline observed during the first
quarter, primarily in net earnings and sales, we prefer remaining
on the sidelines for the time being.
Ericsson, a dominant player in wireless equipment business,
hugely benefited from the constant development in the wireless
industry, especially in emerging markets. In addition, the
escalating demand of the latest mobile devices for 3G and 4G
services, tablets and smartphones is likely to drive the company's
overall revenue in the coming years.
Ericsson's flexible cost structure helps the company mitigate
the impact of sluggish sales trends on margins, while enabling it
to quickly capitalize on the emerging opportunities. The company's
SG&A expenses have reduced by 3% to $868.5 million in the first
quarter of fiscal 2012, reflecting the Ericsson's ongoing effort to
trim down expenses. Consequently, we expect an improvement in the
company's profitability moving forward.
The recent acquisition of Telcordia and BelAir Networks will
facilitate Ericsson further, heightening its market share in mobile
broadband platformgoing forward. We believe that the company's
initiative to set up various R&D centers in numerous locations
will enhance Ericsson's operational potential in future.
However, the leading telecom service provider is in competition
with well-established players such as
Aviat Networks, Inc.
Ubiquiti Networks, Inc.
Comtech Telecommunications Corp
), on the basis of quality and service. Hence, Ericsson is obliged
to reduce its selling price, production costs in order to attract
customers and also maintain the existing associations which may
appear to be costly.
Moreover, the slower-than-expected GDP growth and the economic
uncertainty prevailing in the US economy are predicted to worsen
Ericsson's level of investment in network development, and consumer
telecom spending. External factors like cost inflation and foreign
currency fluctuation are also expected to adversely impact the
company's financial results through affecting its margin.
Given the balanced risk-reward scenario, Ericsson currently
maintains a Zacks #3 Rank, which translates into a short-term Hold
rating for the stock.
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