Ericsson ERIC is set to report fourth-quarter 2017 results on Jan 31.
The company has a dreadful earnings history, with repeated, colossal earnings misses. Last quarter, the company missed estimates for the seventh consecutive quarter, recording a massive negative surprise of 700%. Ericsson witnessed an average negative surprise of 449.1% for the trailing four quarters.
Let's see how things are shaping up for this announcement and whether Ericsson is set to add yet another earnings miss to its losing streak.
Factors to Consider
Ericsson is in the midst of its worst crisis in a decade, grappling with shrinking markets and stiff competition from China's Huawei and Finland's Nokia. Slowdown in spending by wireless carriers severely hurt the company’s financials over the past few quarters and is expected to hurt the fourth-quarter results as well.
Most of the company’s troubles have stemmed from drying-up investments by major telecom equipment makers across the world. Particularly, uncertainty in the financial markets, reduced consumer telecom spending and delayed auctions of spectrums pose significant threats for Ericsson. The company’s revenues and margins in the Networks and IT & Cloud segments continue to take a grave beating from adverse industry trends, which are expected to reflect in the upcoming results as well.
Further, Ericsson foresees sustained weakness in the market for radio access networks to continue. Network equipment sales, particularly in the North America and Europe markets, continue to contract. Europe and Latin America — the markets with the biggest impact — are likely to have an increasingly challenging investment environment in the quarters to come.
Particularly, straight quarters of revenue declines and contract losses in Italy and Russia have made matters worse for Ericsson. This trend is unlikely to reverse itself in the to-be-reported quarter, thus thwarting profitability and sales.
Ericsson Price, Consensus and EPS Surprise
Soft mobile broadband demand and slowdown in emerging markets will continue to put a significant dent in Ericsson’s performance. These factors will likely manifest in the company’s sales in the to-be-reported quarter. In fact, Ericsson expects the industry trends and business mix in mobile broadband to prevail this year as well.
We believe the only potential upside to earnings in the near future depends mostly on expense management. Ericsson had earlier announced a restructuring plan to cut costs and streamline the company’s focus areas, as well as explore options for the media business.
Just last week, Ericsson announced that it is undertaking another colossal write-down by booking charges roughly amounting to a whopping $1.8 billion.
The company will write off assets worth SEK 14.2 billion ($1.77 billion) and another SEK 1 billion ($125 million) non-cash charge will be booked due to the recent U.S. tax reform. Ericsson noted that the charges will not impact cash flow but would affect operating profit in the upcoming quarterly results.
Despite these challenges, Ericsson remains the world’s largest supplier of LTE technology, with a significant market share and has established a large number of LTE networks worldwide. Also, the Ericsson-Cisco partnership, which has been shaping up well ever since its inception in November 2015, is winning Ericsson lucrative awards, which should positively impact the upcoming quarterly results.
Earnings Whispers
Our proven model does not conclusively show that Ericsson will likely beat on earnings estimates in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. This is not the case here as you will see below:
Zacks ESP: Earnings ESP for the company is currently pegged at +7.14%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Ericsson has a Zacks Rank #5 (Strong Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks That Warrant a Look
Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Allison Transmission Holdings, Inc. ALSN, with an Earnings ESP of +10.40% and a Zacks Rank #2, is expected to release quarterly numbers around Feb 5. You can see the complete list of today’s Zacks #1 Rank stocks here.
Catalent, Inc. CTLT, with an Earnings ESP of +1.91% and a Zacks Rank #3, is slated to report results on Feb 5.
Hess Corporation HES, with an Earnings ESP of +1.40% and a Zacks Rank #3, is expected to report quarterly figures around Feb 5.
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