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* Data traffic seen boosting networks, but pace uncertain
* Competition tough, margins may be under pressure
STOCKHOLM, Nov 16 (Reuters) - The telecoms gear market is showing signs of life, but analysts are divided over whether operators' need for network capacity will bring a flood of revenue for Ericsson ERICb.ST or just a trickle.
The world's top mobile network maker beat forecasts in the third quarter and its networks unit grew revenues for the first time in more than a year. Nokia Siemens Networks [NSN.UL] and Alcatel Lucent ALUA.PA also booked top line gains.
Ericsson shares are up around 7 percent this year, just underperforming the European technology index .SXKP. They were at 70.25 crowns at 0927 GMT. Ericsson trades at 11.4 times earnings on a forward 12-month basis versus 11.3 for Nokia and 16.5 times for Alcatel Lucent, according to Reuters StarMine.
Ericsson bulls point to strong spending in developed markets as a sign operators elsewhere will need to upgrade networks.
“The main driver remains the tremendous growth in mobile data traffic,” said Odon de Laporte, analyst at Cheuvreux. “You can see that Ericsson benefits from the trend in the U.S. and the rest of the world will follow.”
A recent survey showed two-thirds of operators around the world face network capacity problems. [ID:nLDE6A707A]
“Even if capex will stick at the current percentage of sales ... there will be a larger proportion tilted toward equipment,” said Daniel Djurberg, analyst at Nordea.
After contracting sharply, the network market has bottomed out, with 3G awards in India, modernisation in Europe and upgrades in the U.S. and Japan.
“I would expect Q4 and the first half of next year to be strong ... India is back on track, China is doing well, the U.S. is still strong and I think Europe is coming back very strongly,” said Pierre Ferragu, analyst at Sanford Bernstein.
Ferragu, who has a target price of 100 crowns per share for Ericsson, said worries of a price war with firms such as China’s Huawei [HWT.UL] were overdone. Ericsson continues to enjoy strong margins with further cost cuts to come, he said.
Parts shortages that hit earlier this year are set to ease gradually and managed services -- outsourcing of network management -- is another positive for Ericsson.
“If you assume a flat market for hardware and a growing market for services, I think the outcome is rather positive, especially if you assume the content in terms of software within the equipment part is going to increase,” said de Laporte, who targets 90 crowns for Ericsson shares.
Bears say overall network spending is likely to be slow. Data traffic is surging, but operators’ revenues are not.
“I think it will be a fairly dull market. Overall if you look at the global telecoms equipment market -- (growth will be at) low single digits at best in dollar terms,” said Lars Soderfjall, analyst at Alandsbank, who has a target of 72 crowns for Ericsson.
Margins will come under pressure due to 3G roll-out in India next year, European modernisation projects and an increasing number of Long Term Evolution orders for 4G networks.
“There was no confidence that the margin is sustainable into the next year, quite the contrary. They were not literally warning for it, but definitely saying that there is margin pressure going into 2011,” said Per Lindtorp, analyst at Eric Penser.
“Even in a bullish scenario where Ericsson keeps their market share or even increases their market share, they will have, possibly, a couple of years of compressed margins.”
Lindtorp has a target of 67 crowns for Ericsson.
The weak dollar impacted Ericsson in the third quarter and is likely to continue to do so. Competition also remains tough, especially from Chinese vendor Huawei [HWT.UL].
“This price competition will be with us for some time,” said an analyst who declined to be named, adding Ericsson’s focus on protecting profits would mean disappointing sales growth ahead. (Editing by Jon Loades-Carter)
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