Ericsson Continues to Be a Better Buy Than Its Finnish Rival
It’s been a long time since I’ve written about Ericsson (NASDAQ:ERIC), the Stockholm-based 5G play. It was March 2, to be precise. On that occasion, I recommended that investors consider two ETFs as alternative bets on 5G and ERIC stock.
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Eight days later, I covered Nokia (NYSE:NOK). I argued that the CEO’s departure hindered the company’s progress in 5G. As such, I wasn’t a believer in its stock. Despite the change, it has managed to gain some ground in the four months since.
At this point, both ERIC and its Finnish rival have market capitalizations within shouting distance of each other. If you own ERIC, I believe you own the better of the two stocks.
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Here’s why.
Forget 5G and Focus on the Financials
Don’t worry. We’ll get to the 5G discussion shortly. I just wanted to make sure we were on the same page about each companies’ financial footing before covering off the opportunities and threats to both of their 5G ambitions.
When it comes to a company’s financials, I’m always interested in its ability to generate cash. If you’re bringing in more cash than you’re sending out, you can still live to fight another day. That’s why investors love Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). They’re cash-flow machines.
As for Ericsson and Nokia, here’s how they shake out.
According to Morningstar, in the trailing 12 months ended March 31, 2020, it has a free cash flow of 9.14 billion Swedish kronor ($1 billion), an enterprise value of $31 billion, and an FCF yield of 3.2%.
As for Nokia, it has a free cash flow of 600 million euros ($678 million), an enterprise value of $22.6 billion, and an FCF yield of 3%.
From this valuation perspective, they’re very close. Let’s move to their respective cash positions.
Nokia had 6.59 billion euros ($7.45 billion) in cash at the end of Q1 2020 and 5.96 billion euros ($6.74 billion) for a net cash position of $710 million. Ericsson, meanwhile, had 57.29 billion Swedish kronor ($6.21 billion) in cash and 51.24 billion Swedish kronor ($5.56 billion) for a net cash position of $650 million.
Could you get any closer?
Based on a market cap of $31 billion, Ericsson is trading at 47.7 times net cash, while Nokia is trading at 32.5 times net cash.
There’s a reason why Ericsson has a slightly higher valuation than Nokia. Care to guess what it is?
ERIC Stock and 5G
InvestorPlace’s Jamie Johnson recently discussed the pros and cons of ERIC stock. Two out of three pros were 5G-related.
“For investors looking to capitalize on the shift to 5G, Ericsson is certainly one of the best options available. The company continues to expand its market share and strengthen its position in China,” Johnson wrote July 7.
“In June, the company announced that it was awarded contracts from the three largest operators in China. This will help position the company as one of the largest 5G vendors and will help drive future contracts.”
She went on to highlight Ericsson’s first-quarter results, which included a 5% increase in sales of its Networks segment, to $3.47 billion with a 140 basis point bump in its gross margin to 44.6%.
Thanks in large part to 5G, its overall gross margin in the quarter increased 190 basis points to 40.4%.
The Bottom Line on ERIC Stock
Sure, there is short-term weakness in its business due to the novel coronavirus. Still, as InvestorPlace contributor Eric Fry pointed out recently, America is ready for an infrastructure revitalization led by 5G.
“Ericsson is at the right place at the right time. Governments are spending money to try to get their economies up and running again. And due to the quarantine, mobile networks are now a top priority. With Chinese manufacturers sidelined, Ericsson has a golden opportunity to cash in on these trends,” Fry wrote July 7.
I don’t think there’s any question that ERIC stock will benefit from 5G. I also think you can say the same thing about Nokia. So, the question is which company do you believe will benefit most from the impending infrastructure spending?
I believe Ericsson is the answer.
That said, if 5G is your play, there are better options available — First Trust Indxx NextG ETF (NASDAQ:NXTG) comes to mind — than these two Scandinavian rivals.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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