October 25, 2004
You've heard it said before: "Invest in a company's future, not in its past." In the case of Ericsson (Nasdaq: ERICY ) , the market has rightly taken the recommendation to heart. On Friday, the Swedish telecommunications equipment supplier delivered a first-class set of Q3 figures. The market's response was to shear nearly 9% off Ericsson's share value. The reason: Ericsson's tepid outlook for the year ahead.
Ericsson earned $666 million in Q3, compared with a charge-laden loss of $541 million in the same period last year. Sales jumped 14% from a year ago to $4.41 billion. Margins held strong, with a whopping 47% gross margin and 23% profit margin. Ericsson has successfully focused on unloading costs and boosting sales. It's the double impact of that work that created such strong results in Q3 and the previous two quarters.
The trouble is that next year's sales prospects aren't inspiring. In its conference call Friday, Ericsson drew attention to "the gradually abating effect of operators' catch-up spending." Ericsson estimates only slight growth in the overall global telecom systems market in 2005. That's the last thing that any investor wants to hear.
The outlook gives investors a good reason to lose hope of more upside from Ericsson. Besides, pricing pressure from competitors Nokia (NYSE: NOK ) , Lucent (NYSE: LU ) , and Nortel (NYSE: NT ) will no doubt put a damper on revenue growth and make it awfully difficult for Ericsson to prop up its hefty profit margins.
As I pointed out back in July, without a major growth catalyst Ericsson will be hard-pressed to keep the share price beyond $30.00. Today's price of $28.41 gives Ericsson a P/E of 20 times. With growth and margins at their peak, that's stretching things a bit.
Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.