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Why Telefonaktiebolaget LM Ericsson Shares Jumped 10% Today

By Anders Bylund - Oct 20, 2017 at 11:47AM

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The Swedish telecom equipment maker's tides are turning, as seen in the latest earnings report.

What happened

Shares of Telefonaktiebolaget LM Ericsson (ERIC 4.01%) soared on Friday morning, following the telecom infrastructure specialist's release of third-quarter results. As of 9:55 a.m. EDT, Ericsson stock had gained 9.7% on heavy trading volume.

White Ericsson logos on an office building, shot at night.

Nighttime close-up of Ericsson's Stockholm headquarters. Image source: Ericsson.

So what

Ericsson's third-quarter sales decreased 6% year over year, landing at $5.9 billion. The company reports its results in the Swedish krona, and the U.S. dollar's value measured against that currency has fallen by 8.5% over the last 52 weeks. Accounting for that currency exchange effect, Ericsson's dollar revenues increased by 2%.

On the bottom line, Ericsson reported an adjusted net loss of $0.07 per share and ADR, down from positive, currency-adjusted earnings of $0.04 per share in the year-ago quarter.

Analysts were expecting a net loss of $0.03 per share on top-line sales in the neighborhood of $5.7 billion. This was a mixed quarter, as Ericsson beat revenue estimates while falling short of Wall Street's earnings targets.

Now what

Taking Ericsson's recent history of plunging earnings and sales into account, any sign of stabilization is good news:

ERIC Chart

ERIC data by YCharts.

Looking ahead, management expects revenue growth to flatten out in the fourth quarter. The bottom line will absorb rising R&D costs and a small restructuring charge, along with lower gross margins as Ericsson expands its market share in the large but cost-sensitive Chinese market. Ericsson hopes to play a major role in China's transition to 5G wireless technologies, extending the lessons learned there to other market opportunities. Northeast Asia, which includes China and Japan, accounted for just 12% of Ericsson's third-quarter revenues, behind 26% from North America and 31% from customers in Europe and Latin America.

The stock has now gained 20% over the last year, in line with the S&P 500 benchmark index. P/E ratios are up in the air given how close to breakeven Ericsson's earnings are running, but shares look affordable on a price-to-sales or price-to-book basis. There should be room for some solid share price growth as the Swedes exploit the upcoming 5G sea change.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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