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Vivek Kumar
Ericsson

Ericsson, a Swedish multinational networking and telecommunications company, has agreed to acquire Cradlepoint, the U.S.-based market leader in Wireless Edge WAN 4G and 5G Enterprise solutions, for $1.1 billion with the transaction expected to close before the end of Q4 2020.

The technology company said the deal price, which is funded from Ericsson’s cash-in-hand, is paid in full on closing. Cradlepoint’s sales for 2019 were SEK 1.2 billion with a gross margin of 61%.

Ericsson’s operating margins are expected to be negatively impacted by approximately 1% in 2021 and 2022 – where half is related to amortization of intangible assets which arise from the acquisition. Ericsson said its 2022 group financial targets remain unchanged.

“We think this is a well-conceived acquisition—strong strategic fit and a reasonable purchase price. We will wait for close of the deal to revise our estimates. Reiterate Outperform,” said Paul Silverstein, equity analyst at Cowen and Company.

Ericsson’s shares closed 1.30% higher at SEK 98.26 on Friday; the stock is up over 20% so far this year.

Ericsson stock forecast

Morgan Stanley gave a target price of SEK 110 with a high of SEK 70 under a bull-case scenario and SEK 135 under the worst-case scenario. Ericsson stock price forecast was raised by Independent Research to SEK 110.00 from SEK 93.00, but rated “Hold”.

Other equity analysts also recently updated their stock outlook. Barclays raised their target price to SEK 110 from SEK 100; JP Morgan upped their target price to SEK 110 from SEK 104; Liberum upgraded their stock price forecast to SEK 115 from SEK 101; Deutsche bank raised the target price to SEK 92 from SEK 87 and Citigroup raised their price target to SEK 112 from SEK 102.

The one listed on the U.S. stock exchange, three analysts forecast the average price in 12 months at $11.80 with a high forecast of $13.00 and a low forecast of $10.00. The average price target represents a 5.83% increase from the last price of $11.15. All those three equity analysts rated “Buy”, according to Tipranks.

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Analyst views

“We believe Ericsson has an opportunity to press home its product and operational advantages as global 5G network deployment ramps up. We see operational and profitability momentum at Ericsson continuing (with expanding market share and margins). FCF generation continues to improve at an impressive rate and the company’s product portfolio is well positioned near term,” said Dominik Olszewski, equity analyst at Morgan Stanley.

“2020-22e we forecast 16% cumulative FCF yield (best since 2010) and ROCE of c. 16%, the best since 2007. Through cycle average P/E 16x, EV/EBIT 10.6x – at base case PT we expect EV/EBIT 12x, undemanding given structural growth, improving cash flow and strong balance sheet,” Olszewski added.

Upside and Downside Risks

Upside: 1) Accelerated and larger global 5G rollout.; Covid-19 highlights strategic value of connectivity. 2) Ericsson wins greater market share in European 5G rollout. 3) Digital Services margin turnaround beats lowered expectations, highlighted by Morgan Stanley.

Downside: 1) Telcos meaningfully cut spending plans due to Covid-19. 2) Strategic contracts prove excessively dilutive to margins. 3) Digital Service margin turnaround continues to falter.

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