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Ericsson (ERIC) to Report Q1 Earnings: What Lies Ahead?

Zacks Equity Research

Ericsson ERIC is scheduled to report first-quarter 2019 results before the opening bell on Apr 17. In the last reported quarter, the company missed estimates by 22 cents. The Swedish telecom firm pulled off a trailing four-quarter average positive earnings surprise of 3.5%, despite missing estimates twice.

The company is likely to report lower revenues in the first quarter owing to dent in demand triggered by reduced consumer telecom spending. Let’s see how things are shaping up for the upcoming announcement.

Factors at Play

Ericsson’s business has been largely impacted by the political and economic uncertainties in its operating countries. Particularly, uncertainty in the financial markets, reduced consumer telecom spending and delayed auctions of spectrums are significant threats for Ericsson. The company’s gross margin at Digital Services continues to take a grave beating from adverse industry trends.

Persistent low investments in mobile broadband in certain markets and lower managed services sales have further harmed Networks segment, while lower legacy product sales have hurt IT & Cloud revenues. Lower IPR licensing revenues and an unfavorable mix between coverage & capacity and services are adding to the company’s concerns. Moreover, Ericsson has been facing investment headwinds in network developments in Mediterranean, Northern Europe and Central Asia (especially Russia) regions as well as in Latin America and the Middle East.

In addition, soft mobile broadband demand and challenging macroeconomic conditions in the emerging markets are acting as a deterrent for major investments by telecom equipment behemoths. These factors manifested in the company’s poor sales. Overall, the company expects the negative industry trends and business mix in mobile broadband to prevail in the short term. Europe and Latin America — the markets with the biggest impact — are likely to have an increasingly challenging investment environment. The Chinese market is also expected to record below par performance due to declining LTE investments, even as North America enjoys a positive momentum.

To add to the woes, stiff competition from rivals like Nokia and low-cost firms like Huawei has forced the company to reduce its selling price, while raising its promotional costs to attract customers. Moreover, the ongoing industry consolidation is posing a threat to Ericsson, impacting investments adversely and intensifying price competition. It appears that the company’s cost-cutting plans and job reductions are not adequate to counter macroeconomic woes and swiftly declining product demand.

All these factors are likely to translate into lower revenues in the quarter. The Zacks Consensus Estimate for total revenues is currently pegged at $5,261 million, down from $5,353 million reported in the year-earlier quarter and $7,053 million in the prior quarter.

Earnings Whispers

Our proven model does not conclusively show that Ericsson is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and Zacks Consensus Estimate, is 0.00% with both pegged at 4 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Ericsson Price and EPS Surprise

 

Ericsson Price and EPS Surprise | Ericsson Quote

Zacks Rank: Ericsson has a Zacks Rank #5 (Strong Sell).

Note that we caution against stocks with a Zacks Rank #4 (Sell) or 5 going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

CommScope Holding Company, Inc. COMM is expected to release quarterly numbers on May 7. It has an Earnings ESP of +1.89% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Juniper Networks, Inc. JNPR is scheduled to release results on Apr 25. The company has an Earnings ESP of +10.00% and has a Zacks Rank #2.

The Earnings ESP for Acacia Communications, Inc. ACIA is +5.73% and it carries a Zacks Rank of 2. The company is likely to report quarterly numbers on May 2.

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