EUR 850.00 For Business Accounts Only

Morningstar | Ericsson's Analyst Day Reaffirms Turnaround and Provides Growth Plans; Keeping SEK 66 FVE. See Updated Analyst Note from 08 Nov 2018

No-moat Ericsson's Nov. 8 analyst day focused on reaffirming its turnaround progress and strategic vision toward 2022. Ericsson expressed that the business stabilized after large restructuring efforts, returned to profitability, and is now prepared for a growth phase. As one of the leaders in telecommunication infrastructure, we view Ericsson as a main benefactor of 5G and "Internet of Things" network rollouts. In our view, more antenna systems with management software and services, from firms like Ericsson, are required as 5G and Internet of Things networks proliferate. We expect Internet of Things networks, from monitoring industrial equipment to optimizing agricultural fields, will open up adjacent markets for Ericsson's growth plans. After incorporating Ericsson's slight financial updates into our model, we are maintaining our fair value estimate of SEK 66 per share.

Ericsson slightly increased its 2020 revenue target to SEK 210-220 billion from SEK 190-200 billion (SEK 5 billion is due to foreign exchange and SEK 2 billion from now including Red Bee Media). Our previous 2020 and 2022 revenue forecasts were already toward the low end of the updated guidance and we adjusted segment forecasts due to Ericsson moving some expected revenue between its digital services and managed services segments. Beyond growth from Ericsson's core markets and expected 5G and Internet of Things growth, the company announced it plans to have small M&As to fill any portfolio gaps for adjacent markets. Although the company has undergone large restructuring efforts to remove costs, Ericsson plans to keep R&D investments a focus in order to have a robust innovation pipeline after the initial 5G rollouts. The operating margin targets, on a non-IFRS basis, were reiterated to be at least 10% by 2020 and at least 12% by 2022 as Ericsson takes a more disciplined approach to winning deals.

Ericsson increased the sales target for the networks division to SEK 141-145 billion from SEK 128-134 billion due to strong 5G deployments demand. Also, markets outside of mobile phone communication are expected to create opportunities for radio antenna systems and software-defined networking. On a combined basis, the digital services and managed services businesses' sales targets stayed relatively constant from prior guidance. Those businesses are expected to grow through selling more artificial intelligence, automation, and cloud-based solutions. The outlook for Ericsson's emerging business and other segment was increased slightly to SEK 5-7 billion by 2020 due to keeping Red Bee Media inhouse.