Despite Recent Scandals, Ericsson Stock Is Still A Buy
Vincent Martin | Apr 22, 2022 13:08
The case for owning Ericsson (NASDAQ:ERIC) is not that difficult. The telecom equipment manufacturer occupies a key position in the rollout of 5G (fifth-generation) wireless globally. That alone suggests years of end market growth ahead.
The Stockholm-headquartered mega-cap should also gain market share as political considerations have hamstrung one of its competitors, Huawei, and consistent subpar execution damaged another. Despite the seemingly sunny long-term outlook, ERIC stock has, for years, looked rather review , at year-end Ericsson supplied 108 of the 200 live 5G networks worldwide. Profit margin targets released in 2018 were reached. The same was true for free cash flow margins.
Ericsson has grown its top line and improved its profitability. Its dividend has increased (and at the current price should approach a 3% yield this year). The company has taken share from Nokia, and even with the recent pullback ERIC has handily outperformed NOK over the past five years.
The forward-looking opportunity remains. Ericsson expects the number of customers served by 5G to more than double by 2027 (that projection comes from the 2021 annual review as well). There's a multi-year tailwind to revenue, and Ericsson expects further profit margin expansion going forward.
That combination means, at worst, high-single-digit earnings growth. Yet ERIC, at 10x 2023 analyst profit estimates, is priced as if it won't grow at all.
There will be some dips along the way. News around past corruption and potential fines could hit the stock. Supply pressures will hit free cash flow and margins. It may take some time for the attractive long-term case to again become clear.
But it's likely that will happen at some point. When it does, ERIC stock should resume the upward trajectory of the last few years.
Disclaimer: Vince Martin has no positions in any securities mentioned.
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