Why Did Telefonaktiebolaget LM Ericsson's (ERIC) Stock Drop Today?

ERIC was trading 9.6% down. Following a disappointing first-quarter earnings release, ET today. The telecom equipment maker's first-quarter performance was lacklustre and investors are wary about a potential large legal issue.
WAN CHAI, Hong Kong - May 26, 2022 - PRLog -- In constant currencies, sales for the Swedish telecom infrastructure expert rose 11% to $5.9 billion in the first quarter. Earnings per American depositary share increased from $0.07 to $0.12. (ADS). The top-line performance was in line with Wall Street expectations, although the average analyst expected earnings of around $0.15 per ADS.

In North America and Europe, Ericsson's revenues climbed moderately, owing to strong demand for telecom-grade network equipment and services. On the other hand, the Russian invasion of Ukraine had a negative impact on the company's earnings, as Ericsson had to halt operations in Russia indefinitely.

Ericsson also expects the US Department of Justice (DOJ) to demand monetary settlements linked to the company's commercial activities in Iraq between 2011 and 2019. The exact amount of these fines is unknown but they might be large. Installations of 5G wireless networks and related services are progressing well, proceeding within the company's estimated time frame and should offer a stable operational platform for the next few years. This network upgrade cycle, according to CEO Börje Ekholm, will endure longer than the previous 3G and 4G upgrades. Overall, the company's long-term prospects appear to be promising.

Meanwhile, Ericsson's stock has dropped 40% from multiyear highs reached in April 2021. It's currently trading for just 10.4 times trailing profits and 1.3 times revenues, making it a good buy. Regrettably, this is only true as long as the DOJ probe does not result in heavy fines. On that perspective, the pessimistic value makes sense given Ericsson's unresolved shadow of Iraqi penalties.

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