Will Ericsson (ERIC) Disappoint Again in Q4 Earnings?

Telefonaktiebolaget LM Ericsson (publ) ERIC is set to report fourth-quarter and full year 2016 results on Jan 26.

Last quarter, the company posted the third consecutive earnings miss, recording a negative surprise of 55.6%. Ericsson has an average negative surprise of 23.0% for the trailing four quarters, clocking only one beat.

Let’s see how things are shaping up for this announcement.

Factors Influencing this Quarter

Over the past one year, soft mobile broadband demand and slowdown in emerging markets have significantly dented sales. Challenging macroeconomic conditions in the emerging nations have acted as a deterrent for major investments by telecom equipment behemoths. Among its markets, Europe has been hit the worst, marring the company’s prospects.

Also, Ericsson’s mobile broadband sales continue to be affected by adverse industry trends. During the third-quarter results, the company expressed concerns regarding renewing an important “managed services contract” in North America with reduced scope, thus signaling at bleak prospects. In addition, a decline in both mobile broadband coverage and capacity sales are expected to dent the top and the bottom line to a great extent.

Ericsson Price and EPS Surprise

 

Ericsson Price and EPS Surprise | Ericsson Quote

In addition, the benefits from the cost-cutting initiatives of the company are slower than expected. Ericsson has been witnessing high restructuring charges that are proving to be a drag on financials. In relation to job reduction in Sweden, Ericsson raised its 2016 restructuring charge estimates for 2016 to SEK 5.5–6.5 billion from SEK 4–5 billion.

Higher restructuring charges will likely translate into increased operating expenses for the soon-to-be-reported quarter. We believe Ericsson’s savings plans and job reductions are not an adequate measure to counter the steep decline in demand.

Despite these challenges, Ericsson is the world’s largest supplier of LTE technology with a significant market share and has established a large number of LTE networks worldwide. During the fourth quarter, the company was selected by Turkcell to manage and operate its mobile and fiberoptic fixed networks. In addition, the company clinched two European Commission funded projects as part of the Horizon 2020 Programme.

Also, the company’s broadcasting and media industry business has managed to rake in significant revenues. During the fourth quarter, the division won a multi-year feature film deal from 20^th Century Fox Television Distribution along with a media delivery services contract from Australian public service broadcaster, Special Broadcasting Service (SBS). We believe these contracts will help the company counter the near-term challenges and boost its top line to some extent.

Earnings Whispers

Our proven model does not conclusively show that Ericsson is likely to beat the estimates this quarter. This is because 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. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for the company is currently 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 10 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Ericsson carries a Zacks Rank #4 (Sell). Please note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

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:

Applied Optoelectronics, Inc. AAOI has an Earnings ESP of +15.9% and a Zacks Rank #1.

Applied Materials, Inc. AMAT has an Earnings ESP of +6.1% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Microsoft Corporation MSFT has an Earnings ESP of +1.3% and a Zacks Rank #2.

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