Morgan Stanley: Telefonaktiebolaget LM Ericsson Sponsored ADR Class B (ERIC.US) Q3 performance may be affected by the North American market, maintaining a "neutral" rating.

Morgan Stanley recently issued a forward-looking report on Telefonaktiebolaget LM Ericsson Sponsored ADR Class B (ERIC.US) ahead of the release of its third-quarter 2025 performance, focusing on Q3 performance expectations, business adjustment impacts, and investment ratings. The top Swedish company, Telefonaktiebolaget LM Ericsson Sponsored ADR Class B, is expected to release its Q3 financial report on October 14th. The company is currently facing a situation of "soft market coupled with business resilience." Morgan Stanley maintains a "neutral" rating for it with a target price of 80.00 Swedish Krona (SEK). In terms of market environment and core Q3 performance expectations, overall market growth continues to be weak, with telecommunications clients imposing strict control on capital expenditures (capex), which is the main pressure point for revenue growth. North America, as the core market for Telefonaktiebolaget LM Ericsson Sponsored ADR Class B (accounting for 30-40% of revenue), is facing pressure from tough comparisons to the previous year. The revenue growth may be constrained without similar new contracts supporting it, leading to a decrease in overall Q3 sales (expected to be 56.108 billion SEK, a YoY decline of 9.2%). However, the mobile network business is a key highlight, with profitability exceeding expectations. The management expects a gross profit margin of 48%-50%, an increase from the base gross margin of 47%-48% in Q2, which could be a "positive surprise" for Q3 performance. The sale of iconectiv is a core event affecting the accounting of Q3 performance. The sale was completed in mid-August 2025, and Telefonaktiebolaget LM Ericsson Sponsored ADR Class B will recognize approximately 9.9 billion SEK in sale revenue and include 7.6 billion SEK in one-time pre-tax profit (EBIT). This profit will be included in core profit indicators like EBIT and EBITDA, and will not be separately accounted for to reflect underlying business trends. As a result, the expected EBITA for Q3 is 13.8 billion SEK, significantly higher than the 7.4 billion SEK in Q2. The company's net cash is expected to increase to 4.5 billion SEK after the sale, but the management has not committed to special dividends or stock repurchases. The discussion on cash return plans is postponed until the release of the full-year financial report in January 2026. Additionally, the report mentions that the impact of exchange rates is similar to previous periods. Looking back at the second-quarter performance, exchange rate fluctuations had an adverse effect on profitability. This quarter, the exchange rate impact is expected to be similar, with the Swedish Krona (SEK) having a slightly negative impact and the Euro (EUR) providing a slight positive boost. The financial model has undergone key adjustments due to the sale of iconectiv, which previously contributed approximately 4 billion SEK in annual revenue and 2 billion SEK EBIT (A). As a result of the adjustment, the performance for 2025 is significantly improved, with revenue expected to be 23.3 billion SEK (compared to 24.8 billion SEK in 2024), EBIT expected to be 3 billion SEK (compared to 0.5 billion SEK in 2024), and EPS expected to be 7.10 SEK (compared to only 0.01 SEK in 2024). From 2026 onwards, as iconectiv is no longer consolidated into the financial statements, revenue, EBIT, and other indicators are expected to decline in the mid-single digits, with an EPS forecast of 5.94 SEK and revenue forecast of 23.7 billion SEK for 2026. In the long term, the company's gross profit margin is expected to slightly decrease after reaching a peak in 2025, with a revised gross margin of 47.2% in 2025, and forecasts of 46.8% in 2026 and 46.2% in 2027. The dividend policy remains stable, with dividend per share (DPS) forecasts of 3.00, 3.15, and 3.15 SEK for 2025, 2026, and 2027, providing investors with a stable income support. Furthermore, the report mentions that Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's global revenue distribution is concentrated, with North America being the core market, accounting for about 30-40% of revenue. Apart from North America, Europe (excluding the UK), India, and Japan each account for less than 10% of revenue, while the UK and Latin America account for 10-20%. The high concentration in regions may exacerbate the impact of fluctuations in a single market on overall performance. In terms of valuation and scenario analysis, Morgan Stanley uses a forecast EV/EBIT multiple of 8x for 2026 to calculate the target stock price. This multiple is based on the level during the 4G cycle, as 5G capex has stabilized, aligning with the valuation logic of the mature 4G period. The report sets three scenarios: in a bullish scenario, with a prolonged enterprise 5G cycle and no slowdown in the North American RAN market, the target stock price is set at 95.00 SEK (corresponding to 9.5x EV/EBIT); in the base scenario, with current expectations, the target stock price is 80.00 SEK (corresponding to 8x EV/EBIT), assuming stability in the North American market and EBIT profit margins; in a bear market scenario, with a rapid decline in telecom capex and a deterioration in cash conversion rates, the target stock price is set at 58.00 SEK (corresponding to 5.5x EV/EBIT).