Stock of the Day
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Ericsson (ERIC)
Ericsson falls short, loses billions of dollars
Ericsson shareholders probably wish they hadn't gotten out of bed this morning. Shares in the Swedish telecommunications giant plunged more than 25% Tuesday morning to their lowest price in three years after Ericsson warned investors that its third-quarter numbers would be lower than previously expected. The news also pulled down the stocks of other tech companies, including Ericsson rivals Alcatel-Lucent (ALU: Charts, News, Offers), Nokia (NOK: Charts, News, Offers) and Siemens (SI: Charts, News, Offers). With analysts clamoring that Ericsson should have seen this coming and with the company itself predicting no foreseeable change in 2008, is Ericsson stuck between a rock and a hard place? What are its chances of being the next comeback kid?
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| Stock Analysis |
"The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix that also negatively affected Group margins," said Ericsson CEO Carl-Henric Svanberg in a press release the company issued today.
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He can say that again. Ericsson expects third-quarter sales to come in at $6.7 billion, well south of the $7.9 billion generally expected by industry analysts and also far short of its own estimates. Ericsson also said that its operating income will fall to about $866 million, rather than the consensus estimate of $1.4 billion, a walloping 38% blow. Overall, the steep drop in share prices cost Ericsson about $19.5 billion in market value.
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Ericsson banks on its network upgrades business and other high profit margin divisions to offset the intimidating costs of expanding network coverage to new regions, such as India and China. This quarter however, Ericsson simply didn't sell enough in its higher margin businesses to finance its aggressive network growth.
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Market analysts are mixed as to whether this news spells disaster for Ericsson. Some are questioning Ericsson's management, noting that this blunder undermines investor confidence in several of the company's other recent decisions. Others insist that the heart of Ericsson's business model is sound, pointing to solid growth in the past few years that has led to Ericsson capturing an estimated 45% of the market share in its sector. Of course, only time will tell which perspective is correct, but one thing everyone can agree on is that all eyes will be on Ericsson in 2008.
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