Ericsson (ERIC) has been piling up the contract wins for 5G networks.
That’s the future–which is why I’m recommending buying this ADR in my Jubak Picks Portfolio today. If you want to ride the transition to 5G telecommunications network, this is the best horse to ride.
Certainly the present is rather stressful. In the second quarter, for example, Ericsson managed only 1% year-over-year revenue growth despite strong demand for build outs of 5G networks for telecom companies.
Looking out into that future, though, Ericsson has signed deals with all the major Chinese telecom providers for 5G network equipment. It now shows 99 deals for future buildouts as well as having its radio and core equipment live within 54 networks. The goal is to build up enough volume to offset margin pressure from Huawei, Samsung, and ZTE. Don’t have any doubts about it–this is one tough market. Ericsson, Huawei, and Nokia dominate the equipment provider market but Samsung and ZTE are riving into the segment and that’s putting pressure on everyone’s costs. Which is why the other part of Ericsson’s strategy–driving up operating margins–is so important. The company has been cutting cost and selling more high margin software and services. Morningstar projects that gross margins will climb into the mid-to high 30s from 23% in 2017. Gross margins for the trailing 12 months were 37.88%, up from a cycle low of 22.13 in 2017.
The ADRs have traded in a 52-week range of $6.15 to $11.93. Today the ADRs closed at $11.74, down 0.23%. They pay a small 0.63% dividend. The ADRs are up 26.42% in the last month.
One thing driving that recent performance has been the effort by the Trump administration to have U.S. allies ban Chinese gear makers Huawei and ZTE from their 5G networks out of well-founded fears that the Chinese companies will enable Chinese securities agencies to spy on telecom traffic. In 2018, the United States and Australia banned its service providers from using China-based Huawei and ZTE equipment in their network buildouts for 5G. Some other companies seem to be following that lead although the position is a hard sell because the Chinese companies are willing to sell at what look to be subsidized prices.