On Wednesday, Citi updated its stance on Ericsson (BS:ERICAs) (ERICB:SS) (NASDAQ: ERIC), raising the stock's price target to SEK 84.00 from the previous SEK 71.00. The firm maintained a Neutral rating on the shares. The adjustment follows Ericsson's performance and strategic moves that have had a positive impact on its financial outlook.
Citi's analysis highlighted Ericsson's successful partnership with AT&T (NYSE:T), which was established around the same time last year. This collaboration has been pivotal, driving a significant increase in revenue with North America revenue surging by 55% year-over-year.
The analyst pointed out that the deal has been beneficial not only in terms of revenue growth but also in dispelling concerns over profit margins. Ericsson reported near-record gross margins in the third quarter, indicating that the AT&T deal was not secured at the expense of profitability.
Despite facing similar industry pressures as its competitors outside of the U.S., Ericsson has demonstrated effective cost control and working capital management.
While Citi's estimates for 2024 remain relatively unchanged due to weaker seasonality in the fourth quarter, the firm has raised its EBITA forecasts for 2025 and 2026 by 10% and 14%, respectively. This revision is based on the expectation that Ericsson will sustain higher gross margins.
The upgraded price target to SEK 84 is supported by profit forecasts and relies on maintaining a similar valuation multiple. Citi acknowledges Ericsson's sharp execution in a challenging market environment.
However, the analyst also notes that with the anticipation of continued low or no growth, it is difficult to justify an expansion of the valuation multiple, leading to the decision to keep a Neutral rating on the stock.
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