Ericsson Spikes Despite Weak Q1, As Gross Margins Expand

Ericsson (ERIC) shares are rallying impressively despite posting weak Q1 results.

While the telecom equipment company’s top-line results were uninspiring – revenue was down 9% from a year ago and 23% sequentially – the Street has latched on instead to the improvement in gross margin, which came in at 39%, up from 36% a year ago and 35% in Q4.

Despite the impressive performance by the stock, analysts remain skeptical about Ericsson’s prospects.

• Morgan Stanley analyst Patrick Standaert maintains his Underweight rating on the shares, noting that the company’s revenue fell 6% short of expectations, providing “additional evidence it is not the prime beneficiary of the mobile data surge.” He doesn’t think the gross margin improvement is sustainable; the strong Q1 margin, he says, was lifted by a variety of one-offs, and checks find pricing pressure from both Chinese rivals and from Nokia Siemens.
• Capstone Investments analyst Jonathan Kees writes that he is “leery” about the company’s ability to maintain the Q1 margin level “in such a price competitive environment.” He maintains his Sell rating.
• J.P. Morgan analyst Rod Hall likewise is not convinced that the higher margins can be maintained. He says contributing factors included slower spending in India (a market which I assume he means has lower margins), and a higher software mix. He maintains an Underweight rating.
• UBS analyst Gareth Jenkins is more optimistic; he has a short-term Buy rating on the shares, though he keep a Neutral rating on the stock for the long-term. He thinks the higher margin actually is sustainable, as the company benefits from an improved product mix.

ERIC is up $1.02, or 9.1%, to $12.28.