The announced measures to improve short-term profitability will not be enough for the company to generate outstanding returns on capital in the long run.
By Ilya Kundozerov | 12-28-16 | 12:00 PM | Email Article

We have taken a fresh look into LM Ericsson Telephone and will reduce our fair value estimate to $7.50 from $9 as we are less optimistic about medium- to long-term gross margin expansion.

Ilya Kundozerov is an equity analyst for Morningstar.

We believe that the announced measures to improve short-term profitability at Ericsson will not be enough for the company to generate outstanding returns on capital in the long run. We think Ericsson requires a more fundamental change in its cost structure to underpin any short-term gross margin improvements.

Similarly, the company’s operating expense profile improvement that should come from research and development facilities consolidation will have to be supplemented by other long-term measures for operating margins to return to more sustainable levels, in our view.

Nonetheless, we see an attractive long-term margin of safety for patient investors in this no-moat company, as shares still appear undervalued today.

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Ilya Kundozerov does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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