When you are an industry leader and one of the largest companies in the country of Sweden, employing more than 100,000 workers, it seems almost impossible that a turnaround would ever be necessary. However, it is not uncommon for large corporations to stray from the path that brought them their greatest success. For telecommunications equipment giant Ericsson (NASDAQ: ERIC), the path back to success may be one that got them there in the first place.
Posting extremely strong fourth-quarter numbers that were driven by high demand for networking equipment in the U.S. market, Ericsson blew by the Wall St. expectations. Sales for the quarter were 66.9 billion SEK, up 23% sequentially and up 5% from the year-ago quarter. Network equipment sales were up 6% from a year ago, driven mainly by North America, while network sales were up 31% sequentially due to normal year-end seasonality. The results translate to $10.5 billion in U.S. currency, which is well ahead of the consensus estimate of $9.5 billion.
CEO Hans Vestberg said in a statement:
Segments showed mixed developments during the year with strong growth in Global Services and Support Solutions, while Networks had a more challenging year. Support Solutions went from losses in 2011 into profitability and together with Global Services represented close to 50% of Group sales in 2012, compared to 42% in 2011.
Vestberg also said that North America was the company’s strongest market throughout 2012 and was driven by continued mobile broadband investments and demand for services. What is so impressive about things of late is that Ericsson has much exposure to Europe, the most troubled spot in the developed world for investors weighing risk these days.
Wall St. analysts embraced the earnings rebound and responded with a flurry of upgrades. On February 1, Goldman Sachs Group Inc. (NYSE: GS) upgraded the stock from Neutral to the prized Conviction Buy List. Credit Suisse Group (NYSE: CS) moved its rating to Neutral from Underperform on the same day. Canaccord Genuity and Citigroup Inc. (NYSE: C) both raised their price targets on the first, following Deutsche Bank A.G. (NYSE: DB) raising the stock to Buy from Hold on January 29. The current consensus price target for the stock is $11.50. Given the recent upgrades, that may soon be lifted.
One very positive development for the company may be a departure from its money-losing joint venture with STMicroelectronics N.V. (NYSE: STM), the largest European semiconductor company. While it recognized a large charge for its participation, an expected third-quarter 2013 exit will let the company focus on the profitable core businesses.
The Ericsson turnaround may start to get investors looking at two other formerly dominate European companies fighting to regain lost glory. Both Finnish phone giant Nokia Corp. (NYSE: NOK) and French telecommunications equipment maker Alcatel-Lucent S.A. (NYSE: ALU) are trading under $5. Despite industry problems and a loss of market share for both companies, the low stock prices alone could make one or both of them takeover targets if a bottom-fishing turnaround or asset buyer surfaces.
For Ericsson the strength in North America may continue to provide a strong tailwind. With smartphone and tablet sales booming and an ever increasing demand for broadband consuming content, it may be in the right place at the right time to complete its turnaround. Wall St. analysts have at least become very vocal with a wave of upgrades in the Ericsson turnaround story.