Ericsson Stock Forecast: Divestment of Underperforming Subsidiaries Will Allow Ericsson To Focus More On Its Core Business

motek 1  The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First

Ericsson Stock Forecast

Summary:

  • Networking leader LM Ericsson is worth adding to your long-term portfolio. Much of the world still needs better 4G LTE infrastructures.
  • The company’s recent move to sell its power modules subsidiary to Flex is a good sign. Ericsson now has more cash to fortify its core networking business.
  • A move to reduce a company’s diversified business to focus on core products can often lead to better topline and bottomline performance.
  • Ericsson is also looking to sell its large broadcast and media services subsidiary. Selling underperforming subsidiaries is always commendable.
  • ERIC has a bullish one-year algorithmic forecast from I Know First.

I approve of LM Ericsson’s (ERIC) recent decision to sell its power modules subsidiary to Flex. The deal is already signed. Ericsson is exiting the power modules business so it could focus more on its core business of networking, Internet of Things, and digital services.

ERIC already touts YTD return of +25% but I’m still giving it a Buy rating. Divesting some non-essential assets to focus more on core business is always a good event-driven catalyst.

Ericsson Stock Forecast

(Source: Google Finance)

Reuters also mentioned that Ericsson hired banks to explore the possibility of also selling its broadcast and media services unit. These divestment move is likely because the said two subsidiaries are underperforming. Management wants to use the cash proceeds from selling underperforming subsidiaries to help fortify its core networking business.

More Cash For R&D

After Nokia (NOK) bought Alcatel-Lucent, Ericsson really needs a stronger networking division to keep it at pace with its now bigger rival. Researching and developing new networking products/modems takes money. Selling underperforming units that sells power modules or provide broadcast services is one way to fund an increase in R&D budget.

Only a serious long-term investment on R&D can produce innovative products. Better products can help Ericsson competitive against low-pricing Chinese rivals like Huawei and ZTE. It cannot be denied that state-owned Huawei and ZTE’s quick rise in the industry is due to their low-level pricing.

Ericsson’s declining annual revenue performance is in great contrast to Huawei’s rapid revenue growth. When it comes to revenue from wireless/mobile infrastructure sales, Ericsson is now only second to Huawei. This is in spite Huawei being still banned in the U.S.

ERIC Stock Analysis

(Source: finbox.io)

Selling non-essential subsidiaries will lead to Ericsson concentrating more on how it could catch up with Huawei’s emerging dominance in wireless infrastructure.

The World Greatly Still Needs Better Mobile Infrastructure

My bullish outlook for Ericsson is also due to the current state of America’s unimpressive 4G LTE Speed.  Even though the U.S. has achieved more than 80% 4G LTE coverage, its average speed is only 15 Mbps.  Since Huawei and ZTE are unlikely to be able to offer their 4G LTE solutions in the U.S., only Ericsson and Nokia are going to fight over the opportunity to improve America’s pathetic 4G LTE network.

ERIC Stock Analysis

(Source: OpenSignal).

Improving the mobile infrastructure network of the United States is a long-term tailwind for Ericsson. It doesn’t even need to rely on 5G, I think America and other countries like it that still have lower than 20Mbs average LTE speed should be satisfied with Ericsson’s current gigabit 4G LTE solutions.

The most important thing is for Ericsson to have enough marketing budget to promote its gigabit 4G LTE infrastructure to America’s tier 1 wireless carriers like AT&T (T), Verizon (VZ), Sprint (S), and T-Mobile (TMUS). There American wireless carriers are really shortchanging their customers. They could afford to pay for better 4G LTE networks to deliver the same 45Mbps LTE speed of Singapore or South Korea. American subscribers will eventually get wise and demand that Verizon and AT&T improve their network speed so they could enjoy what Singaporeans and South Koreans enjoy now.

When that happens, it will either be Nokia or Ericsson who’s going to build better 4G LTE networks for American wireless companies. SingTel (Singapore’s state-owned telco) is testing Ericsson’s gigabit 4G LTE network solution in Singapore. I hope Ericsson will also bring its gigabit 4G LTE infrastructure solutions to the U.S. America is certainly a much larger market for wireless hardware infrastructure roll-out than Singapore or South Korea.

Conclusion

ERIC is a better investment than NOK right now. Unlike Nokia, Ericsson is not burdened with debt from the purchase of Alcatel-Lucent. Ericsson is more liquid than Nokia right now. Further, the sale of its power modules and broadcast/media services subsidiaries will further improve Ericsson’s liquidity.

Please the study the chart below and you will appreciate ERIC’s advantage over NOK.

ERIC Stock Analysis

(Source: Morningstar.com)

My go-long endorsement for ERIC is also due to it having an optimistic one-year algorithmic forecast from I Know First.

ERIC Stock Analysis

As always, technical indicators and recent candlestick patterns support the bullish one-year algorithmic forecast of I Know First for ERIC.

ERIC Stock Analysis

(Source: StockTA)

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.

ERIC Stock Analysis