Ericsson Telephone Company (NASDAQ: ERIC ) shares soared nearly 8% on Friday after the company reported solid earnings that showed a recovery in its mobile infrastructure business. The company's CEO was particularly bullish, and shares of peers Nokia (NYSE: NOK ) and Alcatel-Lucent (NYSE: ALU ) followed Ericsson higher. Does Ericsson's performance and outlook mean that it's time to jump on the industry as a whole?
Ericsson notes a major turnaround
Ericsson reported second quarter revenue of $8 billion with approximately 53% coming from mobile infrastructure, otherwise known as its Networks segment. This is a segment that has been challenged in recent quarters as Ericsson and other key telecom equipment vendors await key network refreshes and global build outs of improved 4G and LTE networks.
The segment saw a 13% decline during the first quarter, but in the second Ericsson reported a significant turnaround to achieve revenue growth of 3%. Importantly, this segment includes the equipment that's used to build networks, and Ericsson points to a relatively bullish long-term future in this business.
Ericsson has seen an increase in Chinese demand due to the preparation for a large rollout of fourth-generation mobile networks. Investors have been waiting for fulfilled orders, and it now appears that this catalyst has become a reality. In the U.S., increased mobile data traffic has stretched capacity, forcing providers into upgrades.
Furthermore, Ericsson did note specific strengths including base stations, edge routers, and multimedia subsystems, all of which are key pieces of hardware that are crucial in building new-and-improved networks.
Where does Alcatel-Lucent and Nokia come into play?
Behind Ericsson's success, shares of Alcatel-Lucent and Nokia soared 5% and 3%, respectively. The reason for this is because both are also mobile infrastructure providers, and like Ericsson had experienced some fundamental trouble in this key area.
Alcatel-Lucent has shown strong performance in recent quarters due to its success in routing, a high-margin business that grew 16.4% during its last quarter to account for nearly 20% of its total revenue. In fact, many have argued that Alcatel-Lucent's router business alone is worth the company's entire market capitalization.
However, Alcatel-Lucent has been held back in recent years due to weakness in its Access segment, which accounts for more than 50% of total revenue. This segment includes key infrastructure businesses like LTE overlays, 4G networking, and small cells. Overall, Access saw a 4.2% decline in total revenue.
Many of the businesses where Alcatel operates Access are those where Ericsson reported strength, including deals in China for buildouts. With Alcatel-Lucent's routing business performing so strongly, along with IP transports and platforms, a recovery in these underperforming segments could significantly strengthen the overall business.
In regard to Nokia, its Network sales saw a 17% year-over-year decline during the last quarter, which accounts for more than 85% of its total business following the divestment of its handset segment. It clearly has a lot to gain in the event of global buildouts occurring at a faster pace and developed networks undergoing major refresh cycles.
The good thing about mobile infrastructure is that as data usage increases, the need for refreshes and better networks will never be complete. It's a constantly evolving industry, and is one where Nokia, Alcatel-Lucent, and of course Ericsson are highly exposed.
With that said, each company has its strengths and weaknesses. The fact that Alcatel's routing business has performed so well, essentially driving its recovery, indicates that growing strength in mobile infrastructure could really change the entire outlook for the company. At just 0.50 times sales, the fundamental edge goes to Alcatel-Lucent as an investment that could be very lucrative long-term given this new macro-related outlook.
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