Saturday 20 January 2018

Stock pick of the week: Ericsson

Ericsson is a direct play on one of our key structural themes - mobile broadband investment.

Ericsson, with 40pc of market shares and and Huawei dominate the mobile broadband industry and both have strong pricing power.

Mobile networks will need to be updated with additional capacity due to the very rapid growth in 3G and 4G wireless data usage.

We appear to be in the early stages of a multi-year cycle of network upgrades.

Smartphone usage is now over 50pc data versus 20pc for average mobile phone and data uses much more network capacity than voice (for example, 14 million SMS is equivalent size as 8 minutes of HD video).

AT&T, for example, has also reported a rise in data traffic of nearly 5,000pc over the last 12 quarters).

Carriers will need to invest in network capacity in order to maintain market share, which should benefit Ericsson.

Ericsson is trading at EV/sales of 0.8 times and EV/EBITDA of 5 times (trough 4.5t times).

Assuming no cut in earnings forecasts, downside seems very limited.

Other metrics, including strong cash conversion and dividend yield greater than 3pc, also support our investment thesis.

The group currently has €5.5bn in net cash, about 23pc of market capitalisation, and Ericsson should free up more cash as the model mix moves towards more services.

During a period of macro uncertainty, Ericsson should outperform due to its LTE (Long Term Evolution) leadership, its robust cash pile and a resilient services business (45pc of group revenues).

 stock picks are not explicit or implicit recommendations to buy or sell the shares mentioned, under the Market Abuse Regulations 2005. Merrion Stockbrokers may be corporate adviser to some of the shares chosen.

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