What happened
Shares of Telefonaktiebolaget LM Ericsson (ERIC 1.90%) traded 9.6% lower at 10:30 a.m. ET today, following an underwhelming first-quarter earnings report.
So what
The Swedish telecom infrastructure specialist saw first-quarter sales rise 11% in constant currencies, landing at $5.9 billion. Adjusted earnings jumped from $0.07 to $0.12 per American depositary share (ADS). The top-line result was in line with Street estimates, but your average analyst was looking for earnings near $0.15 per ADS.
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Ericsson's sales increased modestly in North America and Europe, led by solid demand for telecom-grade network equipment and services. However, the Russian invasion of Ukraine weighed on the company's results as Ericsson suspended its operations in Russia indefinitely.
Now what
On top of the uncertainty and limited business in Russia, Ericsson also expects the U.S Department of Justice (DOJ) to demand cash payments related to the company's business conduct in Iraq between 2011 and 2019. The size of these fines is not yet known, but the fees could be substantial.
5G wireless network installations and related services are going strong and should provide a robust operating base for the next several years. CEO Börje Ekholm expects this network upgrade cycle to last longer than the 3G and 4G cycles that came before. All told, the company's prospects look great from a long-term perspective.
Meanwhile, Ericsson's stock has fallen 40% from the multiyear highs of April 2021. It looks affordable today, changing hands for just 10.4 times trailing earnings and 1.3 times sales. Unfortunately, that's true only as long as the DOJ investigation doesn't result in completely crippling fines. On that note, the bearish valuation makes sense while the unresolved cloud of Iraqi fines hangs over Ericsson.
