Remain Outperform Ericsson. Downgrading Nokia to Underperform (again)
We upgraded Nokia to Neutral four weeks ago (Tides are Turning) following its 20% fall post Q3 results. After further analysis and industry discussions, we downgrade to Underperform and cut our 2018 estimates, reflecting company-specific challenges we believe the market continues to underestimate. Not only did Q3 results highlight our concerns around R&D costs and cash, but they also illuminated new concerns around market share losses and 5G product readiness.
Ericsson product superiority to drive near term share gains
Based on our checks with Ericsson, Nokia, Huawei, Dell’Oro and two key mobile operators, we believe Ericsson has a near term product advantage as the baseband units it is currently shipping are remotely software upgradable for 5G. We believe this was a driver of share gains in Q3 in the US, Europe and China, and may continue to drive share gains in Q4 and H1 2018. This may help turn the tide on Nokia, positioning Ericsson as a 5G technology leader alongside Huawei.
Nokia consensus still too high
Despite a 14% cut to 2018 consensus EBIT, we are now a further 11% below consensus for 2018 EBIT, driven mainly by our weaker Networks revenue assumptions which are a result of the share losses in China and the equipment swaps in the US. We expect non IFRS EPS to drop by 21% in 2018, creating the risk of a dividend cut. H2 2018 should bring relief as comps ease and 5G spend starts as early as Q4, but the next three sets of results still hold risk. Our new EUR3.3 target price (down from EUR4.2) represents a further 22% downside potential.
Ericsson catalysts to keep coming
Following the ‘no new bad news’ associated with Ericsson’s Q3 results and CMD (which has pushed the shares up 23%), and the market share gains we expect to again be visible in Q4, we view the likely sale of the Media business in Q1, and the arrival of new Chairman Ronnie Leten in H1 2018, as likely to further drive confidence in Ericsson’s turnaround strategy. We reiterate our Outperform rating and SEK70 target price, representing 33% upside potential.