As the digital revolution is making its way around the globe, businesses are increasingly adopting advanced technologies that could play a crucial role in increasing business opportunities exponentially, growing demand for the communication equipment industry. While the semiconductor chip shortage and supply chain crisis exacerbated by the Russia-Ukraine crisis remains a concern, communication equipment is expected to keep witnessing increasing demand in the current cloud computing, 5G connectivity, and the internet of things (IoT) era. According to a Market Research Future report, the global telecom equipment market is expected to grow at a CAGR of 11.23% by 2025. As a result, both Telefon AB L.M. Ericsson ADR (ERIC) and Nokia Corporation (NOK) should benefit.
ERIC provides communication infrastructure, services, and software solutions to the telecom sector. It operates through four segments: Networks; Digital Services; Managed Services; and Emerging Business and Other. NOK provides mobile and fixed network solutions worldwide. It operates through four segments: Mobile Networks; Network Infrastructure; Cloud and Network Services; and Nokia Technologies.
NOK has gained 4.5% over the past year, while ERIC has plunged 42%. Which of these two stocks is a better buy now? Let’s find out.
Latest Developments
On February 16, 2022, ERIC launched IoT Accelerator Connect to bring this capability to enterprises and development projects of all sizes. With one click, Ericsson IoT Accelerator Connect provides enterprises with plug-and-play access to cellular IoT connectivity. This could lead to an increase in demand for its offerings in the upcoming months.
On March 1, 2022, NOK announced the launch of its cloud-native solution, Adaptive Cloud Networking, to transform service provider cloud networks to be consumable, agile, and automated. This could lead to increasing demand for its solutions.
Recent Financial Results
ERIC’s net sales increased 3% year-over-year to SEK 71.30 billion ($7.21 billion) for the fiscal fourth quarter ended December 31, 2021. The company’s net income came in at SEK 10.10 billion ($1.02 billion), representing a 41% year-over-year increase. Also, its EPS came in at SEK 3.02, up 34% year-over-year.
NOK’s net sales increased 5% year-over-year to €5.35 billion ($5.63 billion) for the first quarter ended March 31, 2022. The company’s comparable profit came in at €416 million ($437.54 million), representing an 11% year-over-year increase. Also, its EPS came in flat at €0.07.
Past and Expected Financial Performance
ERIC’s EBIT and levered FCF grew at CAGRs of 35.3% and 4.2%, respectively, over the past three years. Analysts expect ERIC’s revenue to increase 1% for the quarter ending September 30, 2022, and 2.2% in fiscal 2023. The company’s EPS is expected to grow 21.4% for the quarter ending June 30, 2022, and 11.7% in fiscal 2023. Moreover, its EPS is expected to grow at 9.2% per annum over the next five years.
On the other hand, NOK’s EBIT and levered FCF grew at CAGRs of 29.9% and 2.9%, respectively, over the past three years. The company’s revenue is expected to decrease 2.7% for the quarter ending September 30, 2022, but increase 2.5% in fiscal 2023. Its EPS is expected to decline 9.1% for the quarter ending June 30, 2022, but grow 9.3% in fiscal 2023. Also, NOK’s EPS is expected to grow at 8.5% per annum over the next five years.
Profitability
ERIC’s trailing-12-month revenue is 1.02 times what NOK generates. ERIC is also more profitable, with a gross profit margin and net income margin of 43.33% and 9.45% compared to NOK’s 40.54% and 7%, respectively
Furthermore, ERIC’s ROE, ROA, and ROTC of 22.95%, 7%, and 14.77% are higher than NOK’s 9.78%, 3.26%, and 5.77%, respectively.
Valuation
In terms of forward non-GAAP P/E, NOK is currently trading at 11.74x, 8.4% higher than ERIC’s 10.83x. Moreover, NOK’s forward EV/EBITDA ratio of 6.30x is 23.3% higher than ERIC’s 5.11x.
So, ERIC is relatively affordable here.
POWR Ratings
ERIC has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, NOK has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
ERIC has a grade of B for Quality. This is justified given ERIC's 0.80% trailing-12-month asset turnover ratio, which is 27.1% higher than the industry average of 0.63%. On the other hand, NOK has a Quality grade of C, in sync with its 0.58% trailing-12-month asset turnover ratio, 7.6% lower than the industry average of 0.63%.
Of the 55 stocks in the Technology - Communication/Networking industry, ERIC is ranked #5. In comparison, NOK is ranked #18.
Beyond what I’ve stated above, we have also rated the stocks for Growth, Value, Stability, Momentum, and Sentiment. Click here to view all the ERIC ratings. Also, get all the NOK ratings here.
The Winner
The communication equipment market is expected to grow exponentially with increasing demand for advanced devices to facilitate hybrid working. While both ERIC and NOK are expected to gain in the long run, it is better to bet on ERIC now because of its lower valuation, higher profitability, and better growth prospects.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Technology - Communication/Networking industry here.
ERIC shares were trading at $8.17 per share on Tuesday afternoon, up $0.11 (+1.36%). Year-to-date, ERIC has declined -24.12%, versus a -12.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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