Most everybody has just about given up on Sweden's Ericsson (ERICY ), the world's largest maker of wireless networks. Its shares have plunged from 6.20 a share on Dec. 5 to 1.55 on July 2. With the weak market for wireless handsets, and its major telecom customers heavily in debt and delaying orders for new mobile systems, Ericsson remains awash in red ink as revenues keep falling. Is it headed toward insolvency, as some analysts suggest?
Far from it, says Per Lindberg, analyst at Dresdner Kleinworth Wasserstein in London, who doesn't own shares, rates Ericsson a buy. He attributes most of Ericsson's woes to a cyclical downturn. Sure, its market share in the handset business has eroded, but he sees a strong upturn in orders in the second half driven by handsets with such new features as color video and a camera. Lindberg doesn't see the "liquidity issue" that the bears suggest. It "has defied extremely difficult demand conditions," he says, "by swift cost-cuts" and by focusing on efforts to "self-finance operations."
Vince Carino of Brookhaven Capital Management, which has been buying shares, says Ericsson's balance sheet is stronger than the Street perceives: It has $6 billion in cash, vs. debt of $8.5 billion, leaving net debt of $2.5 billion. That doesn't worry him, since Ericsson is selling some noncore assets. Ericsson, he adds, had positive cash flow in the past four quarters and currently has $2 billion in free cash flow. He sees 2002 a wash on sales of $18 billion. The company should make 15 cents a share on sales of $22 billion in 2003, and 25 cents in 2004 on $25 billion sales--prior to any major asset sales, forecasts Carino.
One big positive: It's likely that Ericsson will sell its 50% stake in the Sony-Ericsson joint venture on wireless handsets to Sony, says Carino. He puts the stake's value at $4 billion, or 50 cents a share. "The market has yet to appreciate the stock's huge upside potential, and Ericsson's progress in improving operations," says Carino.
By Gene G. Marcial