Telefonaktiebolaget LM Ericsson Is Primed to Pounce on 5G Wireless Upgrades

Telecom equipment and infrastructure giant Telefonaktiebolaget LM Ericsson (ERIC 1.71%) reported second-quarter results early Wednesday morning. The Swedish company, whose name literally translates into "Phone Corporation LM Ericsson," saw sales falling and net losses growing. Share prices surged anyway because these seemingly weak results actually came in above analyst expectations.

Ericsson's second quarter by the numbers

Data source: Ericsson. Dollar-to-crown exchange rates based on quarterly averages as reported by Oanda.

These figures account for a 5.2% change in the value of Swedish crowns compared to the U.S. dollar. The strengthening of American currency accounted for most of the revenue dip, which stopped at a 0.9% year-over-year drop in the original currency.

The analyst consensus on the Stockholm exchange, where Ericsson is among the largest and most closely watched tickers, had called for top-line revenues of just $5.4 billion. Gross margin also exceeded expectations, paving the way toward positive profits if these improving trends continue.

Image source: Getty Images.

What's new with Ericsson?

Ericsson CEO Borje Ekholm noted that sales increased by 12% in North America as every major wireless network is gearing up for 5G installations in 2019 and beyond. The same impending upgrade cycle also explained the generally soft revenues in this report. This slump should be followed by surging 5G sales in 2019 and beyond.

The American networks are just getting started a little earlier than most of their international peers. In particular, northeast Asia is dragging its feet as Ericsson reported sales in this segment 22% below the year-ago total. Mainland China is tapping the brakes on 4G LTE investments, and the Middle Kingdom is not yet ready to roll out 5G installations.

"We see strengthened momentum for 5G in the quarter and it's clear that our 5G-ready portfolio is attractive and competitive in the market," Ekholm wrote in a prepared statement. "We are confident in reaching our long-term target of at least 12% operating margin beyond 2020."

To put the operating margin goal into perspective, that metric was a negative 1.1% in the year-ago quarter and barely in the green at 0.3% in the second quarter of 2018.

Is Ericsson a buy right now?

Ericsson's share prices have soared 51% higher since bottoming out in early October of 2017. Recently appointed CEO Ekholm is steadying the ship through cost-cutting and at an opportune time, putting Ericsson in position to benefit from the upcoming 5G opportunity.

The stock still sits 41% below the five-year highs that were set in the fall of 2013. The Swedes are making their way back from a long, dark tunnel surrounded by rising Chinese competition and management missteps. The stock still looks expensive at 50 times forward earnings estimates, and these share prices only make sense if you look deep into the impending 5G era where Ericsson's profits should solidify.

I think Ekholm is doing a good job here and that the 5G gains will make today's share prices look affordable in a couple of years. I'm willing to bet my CAPS score on this idea.