Jefferies & Co. said LM Ericsson Telephone Co.'s (NASDAQ: ERIC) strong first quarter results reinforce its view that Alcatel-Lucent (NYSE: ALU) will report solid -- if not strong -- first quarter results.
The brokerage maintained its buy rating on shares of Alcatel-Lucent with a price target of 5 euros.
Moreover, the results support view on Alcatel-Lucent that accelerating wireless software upgrades (EVDO/HSPA+) will drive better-than-expected margin and profitability going forward, said George Notter, an analyst at Jefferies.
Notter said Ericsson's sales totaled 53 billion Swedish krona (up 17 percent year-over-year, but down 16 percent sequential), way above consensus of 46.4 billion Swedish krona. The sales result was up 25 percent year-over-year excluding currency impacts. EPS, excluding items, totaled 1.52 Swedish krona per share (Street is 0.98 Swedish krona per share).
Ericsson’s Networks business -- which is comparable to Alcatel-Lucent’s Wireless business -- reported sales of 33.2 billion Swedish krona (up 35 percent year-over-year). The result was down 9 percent quarter-over-quarter -- impressive for a seasonally soft first quarter. For comparison, Notter is looking for up 20 percent year-over-year and down 15 percent quarter-over-quarter from Alcatel-Lucent’s Wireless business in first quarter.
Notter said Ericsson pointed to continuing strength in hardware and software upgrade activity within their Networks division -- consistent with his EVDO/HSPA call on Alcatel-Lucent . This was evident in Ericsson’s margins (Networks division operating margin equals 17 percent in first quarter versus 13 percent in fourth quarter and 6 percent a year ago).
Also, Ericsson’s North American business was exceedingly strong (up 39 percent year-over-year, down 6 percent quarter-over-quarter). Alcatel-Lucent’s wireless business, of course, is heavily tilted toward North America (Verizon, AT&T, and Sprint).
Moreover, Ericsson’s outlook for CDMA is now better than when they originally acquired Nortel’s CDMA business. Sustainability of demand will depend upon the timing of the LTE ramp and the continuing supply of attractive new handsets in North America. CDMA, of course, is a significant business for Alcatel-Lucent, said Notter.
Notter said Ericsson has seen some minor delays on some component deliveries as a result of Japan. This will have a very minor impact on their business (unclear if Alcatel-Lucent will have the same issues).
According to the original equipment manufacturer (OEM), global mobile data traffic more than doubled in 2010 with traffic forecasted to almost double annually over the next few years. Average smartphones generate 10 times more traffic than feature phones.
Notter said Ericsson, however, is seeing indications of higher-than-average smartphone data usage in the U.S. This last comment jives with views Notter has picked up from industry contacts -- increasing data usage accelerates the need for EVDO / HSPA network upgrades. Moreover, the U.S. is a good litmus test for future demand trends internationally.
For first quarter, the brokerage is looking for Alcatel-Lucent to generate 3.95 billion euros in sales and 0.03 euros in earnings per share. The brokerage's 2011 revenue and earnings figures are unchanged at 17.35 billion euros and 0.39 euros per share, respectively. For 2012, the brokerage's estimates remain 18.06 billion euros and 0.42 euros per share, respectively.
Alcatel-Lucent's American Depository Receipt closed Wednesday's regular trading up 3.01 percent at $6.51 on the NYSE. In the after-hours, the stock further rose 1.08 percent to $6.58. The stock touched a new 52-week high of $6.54 on Wednesday.