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January 30, 2014 3:12 pm
Never mind the quantity – look at the quality. Well, actually, more of the former would be good, too. But, as Ericsson reported 2013 earnings on Thursday, investors were more than happy to focus on improving gross margins – nearly 33 per cent in the final quarter of 2013 (excluding a patent deal with Samsung) compared with just over 31 per cent a year earlier – and set aside sluggish revenues. Shares in the telecoms equipment group, which bounced strongly in late-2012 on news of higher capital spend plans by US-based telcos but have dithered ever since, rallied 4 per cent.
Margins are indeed investors’ best hope. Globally, growth in wireless capital spend is likely to slow this year. Deutsche Bank expects a 3 per cent advance, compared with 8 per cent last year when US carriers were building out 4G/LTE networks. Ericsson will be hoping the revenue mix in North America (a quarter of its sales) shifts to higher-margin capacity spend rather than coverage, and from network outlays to services – a trend it already reports.
True, there is also an expectation that slowly improving returns in Europe’s telecoms sector will finally bolster capex there, too. But when those purse-strings may finally loosen is hard to predict: Vodafone has increased its planned 2014-2016 investment overall by £7bn to £19bn, but many European incumbents are still beset by weak balance sheets. Meanwhile, large LTE coverage projects in China are set to depress hardware margins although this is a small portion of Ericsson’s business.
Industry consolidation is also a potentially bullish theme – and one reason why shares in Alcatel and Nokia (seen as targets or partners) did better than Ericsson’s last year. Still, sector concentration would probably benefit the industry leader, too. On 13 times forward earnings, Ericsson shares are not dear. Even so, investors may need to be patient.
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