20 July 2020

Ericsson Posts Upbeat 2Q, Rides the 5G Wave

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News shaping
the markets today

     

What’s happening: Shares of Telefonaktiebolaget LM Ericsson surged on Friday after the Swedish company reported its second-quarter earnings ahead of expectations.

What happened: Despite the coronavirus outbreak resulting in global economic uncertainty, various telecom majors are going ahead with their previous plans to upgrade their networks to 5G.

While an uptake of 5G in China boosted Ericsson’s commercial contract wins, CEO Börje Ekholm expressed concerns about the European market.

How were the results: Ericsson reported growth in revenues and earnings, with both metrices exceeding the estimates.

  • Sales also rose 1.4% to SEK55.58 billion, versus the consensus view of SEK55.16 billion.
  • Adjusted operating earnings rose to SEK4.5 billion, from SEK3.9 billion in the same quarter last year, beating the average analyst forecast of SEK3.36 billion.
  • Profits attributable to shareholders grew to SEK2.45 billion, from SEK1.71 billion in the year-ago quarter, exceeding the consensus expectations of SEK1.67 billion.

Why it matters: While Ericsson’s legacy portfolio had a negative impact on total sales, the company’s 5G portfolio expanded and is expected to boost revenues in 2021 and beyond.

Even amid the pandemic, most countries have accelerated their investments in 5G networks. Against this backdrop, Ericsson’s commercial contract wins rose to 99 in the second quarter.

The telecommunications equipment company strengthened its market position in mainland China, a market that CEO Börje Ekholm said “is expected to be a driver of critical future requirements and provide us with important scale.” Earlier this year, Ericsson had almost doubled its 2020 global projections for 5G subscriptions to 190 million, backed by a faster uptake in China.

Ericsson and its Finnish rival Nokia are also expected to benefit from the UK’s decision to ban the China’s company Huawei from 5G networks.

Concerns remain, however, as Ericsson continues to witness stiff competition. Moreover, the uptake of 5G in the European market has been sluggish. Ekholm said, “We see many regions around the world increasing investments in this space and as a European company we are concerned that Europe will fall behind.”

Management projected 2020 sales between SEK230 billion and SEK240 billion and adjusted operating margin of over 10% of sales. The company also guided to 2022 adjusted margins between 12% and 14%.

How shares responded: Shares of Ericsson surged 13.2% to close the regular US trading session at $10.89 on Friday. The stock has gained 25% over the past three months.

What to watch: Investors will look out for news of further contract wins, as various regions around the world increase their investments in 5G infrastructure. Although Ericsson has so far faced a limited impact of the pandemic, uncertainties do remain.

The Markets Today

     

European stocks will be in focus today, after closing the week on a higher note.

Context: European stocks closed mixed on the last trading day of the week, as investors digested various earnings reports and continued to keep an eye on the meeting of EU leaders around the coronavirus recovery fund.

Details: European leaders started a two-day meeting on Friday to discuss a €750 billion recovery fund for the Eurozone to provide support to the countries affected by the coronavirus crisis.

Markets remained cautious with the persistent rise in covid-19 cases in the US, with the country hitting a new daily record of around 77,000 new cases on Thursday.

The Institute for International Finance disclosed that global debt increased to $258 trillion in the first quarter and also warned that the debt continues to rise.

The pan-European Stoxx 600 index gained 0.2% on Friday, with auto stocks gaining the most, while bank stocks declined 1% in the session. The European index climbed 1.6% last week.

Shares of SAAB AB rose 4.5% on Friday, after the Swedish company posted a 20% gain in its net profits. Danske Bank reported better-than-expected earnings for its second quarter, while Hexpol released disappointing Q2 earnings.

London’s FTSE 100 gained 0.63% on Friday, while the German DAX 30 index rose 0.35%. However, the French CAC 40 lost 0.31%.

What to watch: Investors await data on current account from the Eurozone. The Eurozone current account surplus, which declined to €10.21 billion in April, is expected to grow to €14.5 billion in May.

Markets will continue to assess the daily covid-19 numbers, with total infections exceeding 14 million globally.

Other Markets: US indices trading closed mixed on Friday, with the Dow Jones index down 0.23%, while both the S&P 500 and Nasdaq 100 gained 0.28%.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Germany’s producer prices, Italy’s current account as well as the US 3- and 6-month bill auctions.

 

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