Ericsson ( NASDAQ: ERIC ) shares slipped fractionally in premarket trading on Tuesday as investment firm Raymond James downgraded the telecom equipment operator, citing growth challenges and margin pressure ahead.
Analyst Simon Leopold lowered his rating on Ericsson ( ERIC ) shares to market outperform from outperform, noting the intellectual property resolution with Apple ( AAPL ) and the settlement with the Department of Justice did not "sustainably catalyze the stock" as worries about market trends continue to get worse. As such, it's likely that any inventory absorption by telecom operators in the U.S. could "weigh on results and sentiment," Leopold added.
"We see potential for improvement in [the second-half of the year versus the first-half], but deem this insufficient to recommend the shares given organic [constant currency] growth challenges and margin pressure," Leopold wrote in an investor note.
Leopold pointed out that trends are "consistent with expectations," but profitability looks worse than expected, though the stock is inexpensive, trading at 11.6 times 2023 earnings and a sales ratio of 0.7.
The analyst also noted that margin improvement in Ericsson's ( ERIC ) cloud software and services segment is "illusive," as it has only reached mid-single-digit operating margins and seems unlikely to help management boost overall profitability.
With Ericsson ( ERIC ) shares having struggled to find support, it's possible that the company could receive some help from positive news flow at Mobile World Congress at the end of the month. Along with slowing headwinds from foreign exchange and spending in the U.S. improving in the second-half of the year, there are potential catalysts ahead, but it's likely that investors are more worried about achieving the 2024 EBITA target.
Last month, Ericsson ( ERIC ) reported fourth-quarter results that missed expectations and signaled a choppy year ahead .
Analysts are universally cautious on Ericsson ( ERIC ). It has a HOLD rating from Seeking Alpha authors , while Wall Street analysts rate it a HOLD . Additionally, Seeking Alpha's quant system, which consistently beats the market, rates ERIC a HOLD .
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Ericsson slips on Raymond James downgrade, cites growth, margin worries