Ericsson demonstrates world class reinvention
It's hard not to have a soft spot for firms like the Swedish technology giant LM Ericsson.
On a local level Ericsson has been an important part of Ireland's domestic industrial sector seemingly forever. But as an investor, my rather more selfish regard for this company stems from its capacity during the last decade-and-a-half, to have emerged as one of the great global masters of reinvention. The lesson of modern business is that if you stand still you get buried. But Ericsson faced up to the staggering unpredictability of a truly mobile internet and adapted quickly to become market leader in network equipment with a one-third share of the world market. It operates in 180 countries worldwide, employs 115,000 including 26,000 in R & D, and has a portfolio of 37,000 patents. Some 40pc of world telecom traffic is carried on networks produced by the company, which is quoted in both Stockholm and New York.
Founded 140 years ago, for most of those years it produced and sold telephones. It was also in some corporate 'wars' in its time. During the Great Depression (or perhaps I should call it the Other Great Depression) in the 1930s the company was hit by scandals that culminated in US rival ITT owning a bulk of its shares. Fortunately for Ericsson that feature called State Aid, now so unfashionable, had nothing like the same odium then, as it now does. The Swedish government and Swedish banks dug Ericsson out of a hole and also out of the grip of ITT.
It was a breakthrough technology company as far back as the1950s. It introduced the world's first fully automated mobile system in 1956.When mobiles arrived it was a major player in the 1990s with 17pc of the world market. However by the start of this century the company was reporting significant losses and opted to reinvent itself. A joint venture with Sony turned out to be an important deal but Ericsson was out of the mobile market by 2010.
Over the last 15 years the company's business has evolved from being hardware focused to being software and services centric. Last year two-thirds of Ericsson's business related to software and services compared to one-third in 1999. The company now focuses on building network equipment like masts, base stations and software, required for running the system, and supports of 500 operator companies worldwide. Sales in its network business now account for half of the group's revenue with North America the significant market. The group's global service business which include consultancy, advising on upgrading, restructuring and integration of networks has revenues of almost €11bn.
Net sales for 2014 were flat at €24bn. The strong sales growth in China, Middle East and India was offset by lower sales in North America and Japan. This year sales are expected to improve, driven by growth in Europe and India and while US sales may slightly decline the strength of the dollar should help. Operating profit of €1.8bn was down 2pc. Surprisingly Ericsson generated one bullion euro in royalties from its patents and recently sued Apple for patent infringement. The company has a market value of €33bn and bumper price to earnings multiple of 30. Its shares are trading at €11.60 just below its yearly high of €12 but more than double its price of 2008. The company announced a new cost-and-efficiency programme with a target of one billion euro, which included a reduction of 2,000 employees in Sweden.
Investors are happy that the company has consistently raised the dividend since 2008; this year is no exception with an increase of 13pc. Interestingly the dividend is up over 50pc since 2010. However they will look at the proposed link-up between Nokia and Alcatel with some concern. While takeovers in the equipment sector are difficult, the merged company with a market share close to Ericsson could be formidable competitors. Given Ericsson's high P/E multiple and the proposed Nokia/Alcatel link-up, Ericsson's shares are a quality share but not one to chase right now.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.