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.
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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