Ericsson (ERIC) Rallies on Better than Expected Sales, Operating Profit

Shares of Ericsson (ERIC) were trading up +0.92 or +7.87 percent to $12.61 per share in Friday's pre-market, after the company released its second quarter 2014 earnings. The company beat analyst expectations, reporting a 76 percent rise in second quarter profits. Ericsson stock closed at $11.69, up +0.08 or +0.68 percent in Thursday's regular trading session.

Stockholm, Sweden based Ericsson, or Telefonaktiebolaget L.
M. Ericsson, the company's original Swedish name, is a multinational company that develops and manufactures telecommunications equipment. The company is separated into various divisions, which include Network, Multimedia and Global Services. In addition, the company offers Information and Communications Technology (ICT) for the telecom and other industries that include software, IP networking and mobile and fixed broadband solutions. Ericsson is one of the world's leaders in 2G/3G and 4G mobile network infrastructure, accounting for as much as 35 percent of the world market.

The company reported a second quarter profit of 2.7 billion kronor or $394 million, an increase of 76 percent over the same quarter one year ago when the company turned a profit of 1.5 billion kroner. The sizable profit was in part due to higher margins, lower restructuring charges, and a streamlining of the company's operations.

Ericsson's April net sales declined to 54.8 billion kronor or $8 billion, versus 55.3 billion kronor in 2013's second quarter. Nevertheless, sales for comparable units adjusted for currency dropped -1 percent year on year and increased +13 percent quarter on quarter. Operating margin improved to 7.3% year on year, driven by a strong showing in segment networks, while operating income came to 4.0 billion kroner.

According to Ericsson's press release, year on year improvement in sales was in large part due to growth in the Middle East, India and China, in addition to continued capacity business in North America. However, sales were offset by lower revenues from two major North American mobile broadband coverage projects that peaked in 2013, as well as a decline in activity in Japan.

Ericsson cited continued political unrest in parts of the Middle East and Africa that were still impacting sales. In addition, continued political uncertainty in Russia and the Ukraine were mentioned but did not have a negative impact on sales in the second quarter.

The company continues to invest in new areas, which include the addition of modems and a Mediaroom business. In addition Ericsson has increased investments in IP resulting in higher R&D costs. Ericsson invested 1.2 billion kronor in the first half of 2014 in R&D, strengthening its technology platform. However the success of the modems and Mediaroom business will hinge on the success of Ericsson's customers and will be measured in an 18-24 month timeframe after the integration of the modems business that was completed in August of last year.

Ericsson stock has traded in a limited range this year, reaching a high of $14.22 per share in September of last year. With continued improvements in cash flows and with the integration of its new businesses, the stock could test its yearly high in the near future.

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Published on Jul 18, 2014
By Jay Hawk
Jay Hawk
Jay Hawk enjoyed a 12-year professional financial markets career incorporating extensive first hand futures and options experience obtained by trading in the stock, commodity and forex markets on U.S. exchanges. Since retiring as a full-time financial market professional, he has been actively trading stock, commodities, forex and options for his own account and managing funds for others, as well as writing financial market commentary and educational articles.

Copyrighted 2020. Content published with author's permission.

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