November 8, 2018 / 7:24 AM / 7 days ago

UPDATE 3-Ericsson nudges up 2020 sales target as recovery gains pace

(Adds analyst comments)

By Helena Soderpalm and Olof Swahnberg

STOCKHOLM, Nov 8 (Reuters) - Ericsson on Thursday raised its sales target for 2020, driven mainly by a recovery in its hard-hit networks business as the market for next-generation 5G mobile equipment shifts into a higher gear.

Ericsson stuck to its target for operating margins to rise above 10 percent in 2020, excluding restructuring, but said its longer term goal of boosting operating margins to greater than 12 percent would occur no later than 2022.

The fresh financial goals failed however to impress the market as several analysts had expected an upgrade, following the Swedish firm’s tentative 2018 recovery after years of crisis.

Ericsson shares were little changed in early trade. The stock has soared 52 percent this year compared with a slight decline for the European technology sector, outpacing the 34 percent rise for Finnish arch rival Nokia.

UBS analyst David Mulholland said in a note to clients that the new forecasts provided little to sustain further stock gains. Ericsson shares carry a price multiple of 17 times earnings compared to a 13 times multiple for Nokia, he said.

“In summary, we think more might have been hoped for and... valuation may start to weigh,” Mulholland said. UBS rates Ericsson as neutral in terms of stock appreciation potential.

The mobile telecom equipment maker now aims for net sales of 210-220 billion Swedish crowns ($23.3-24.4 billion), up from earlier guidance of 190-200 billion, it said ahead of presentations for investors and analysts in New York.

Analysts on average expect a reported operating margin of 10.3 percent in 2020 on sales of 209 billion crowns, according to Refinitiv data.

“With our focused strategy we have created a strong foundation of stability and profitability,” CEO Borje Ekholm said in Thursday’s statement.

“As the industry moves to 5G and IoT (Internet of Things) we are now preparing to take the next step to generate profitable growth in a selective and disciplined way.”

COOL RESPONSE

Activist investor Cevian Capital, with an 8 percent stake at the end of 2017, said the adjustment was conservative and it sees further potential in Ericsson compared to the fresh targets given on Thursday.

“But the higher level of ambition is a step in the right direction for Ericsson,” it told Reuters in an e-mail.

Richard Kramer, founder of London-based Arete Research, who holds a negative rating on the stock, said the updated outlook amounts to tweaking numbers to boost investor confidence.

“A swirl of restructuring, provisions, foreign exchange translation effects, and other elements mask what looks like a lack of operating leverage that consensus estimates imply,” he told Reuters.

Ericsson has responded to an industry-wide downturn and heavy losses since 4G network sales peaked in the middle of the decade with a strategy to focus on profitability over growth, replacing most of its management and making sweeping cost cuts.

It now sits on the cusp of a potential new cycle of network upgrades as demand for 5G gear has started to kick in the United States and is expected to be followed by upgrades in North Asian markets in early 2019.

$1 = 9.0101 Swedish crowns Reporting by Niklas Pollard, Helena Soderpalm, Olof Swahnberg and Johannes Hellstrom in Stockholm; editing by Jason Neely

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