Ericsson lives in the same happy world as its neighbour Nokia - one of booming emerging market subscriber growth and network upgrades.
The former creates demand for second generation, or 2G, GSM infrastructure. The latter keeps developed markets' sales ticking over. Ericsson now supplies 44 of the world's 80 3G WCDMA networks. Third-quarter sales grew by 14 per cent year-on-year. The management threw caution to the wind and upgraded their 2006 market guidance from “slight-to-moderate” to “moderate” growth.
It is a nice picture and, complementing it, Ericsson's €45bn market capitalisation has crept up towards Nokia's €57bn. Yet its Finnish peer is the better bet. For one, 3G spending is increasingly reflected in Ericsson forecasts. The market remains cautious about any uplift to Nokia's later-cycle handset franchise. Both saw margin pressure in the third quarter, but Ericsson has further to fall. Operating margins of 22 per cent compare with an average of 9 per cent since 1999 and Nokia's current 14 per cent. A downturn as severe as that of 2001-04 is unthinkable, but Ericsson is cyclical and enjoys a less commanding market position than Nokia.
Finally, Ericsson's cash conversion remains mixed. This year working capital outflows stand at 141 per cent of net income. The positive inflows seen in 2002-03 were accompanied by contracting sales. Valued at a premium to Nokia and with lower cash distribution to shareholders, Ericsson looks like the inferior wager on some attractive macro trends.
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