Promising Stocks in the Communication Equipment Industry

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The communication equipment industry has started showing signs of recovery after declining for the past five years.

Despite the rising demand for its products and services, the industry is still facing a tough time due to the growing imports from low-cost countries. This trend is decreasing the total revenues of the industry players.

In response, industry players are focusing on acquiring new technologies and managing their product and service lines (Source: IBISWorld). Ericsson (NASDAQ: ERIC), the world’s leading provider of telecommunication equipment and services to mobile and fixed network operators, is following a similar approach. This article will analyze how the adoption of this new approach will benefit investors.

Prospects of Ericsson

Ericsson serves over 1,000 networks in more than 180 countries and more than 40% of the world’s mobile traffic passes through Ericsson’s networks.

In its second quarter of 2013, sales were flat with no Year over Year (YoY) change. Sales of network and global services were higher by 1% and 3% respectively but sales from its support solutions decreased by a significant 33%. This decrease is likely to be reduced in the future due to Ericsson’s recent acquisition of TeleOSS Consulting, a Thailand based specialist in consulting and systems integration for Operating Support Systems. This acquisition will complement Ericsson’s services portfolio of systems integration for OSS in South East Asia and Oceania.

This will also help Ericsson in handling inventory management areas and offer a wider range of solutions. It will help in handling communication traffic and ensuring high class service delivery to the end consumers. This will enhance the quality of service provided by Ericsson.

On July 1, 2013 Ericsson also acquired Red Bee Media, the world’s leading service media company. This acquisition will broaden its broadcast services market and expand its capabilities in the TV industry. It will also expand its operations in European and Australian markets. The company is investing in the TV industry because video sharing is currently the single biggest contributor to mobile traffic, which is expected to grow by 60% annually till the end of 2018. The company is currently processing over 50% of the video demand around the world. These acquisitions will help the company in attracting even more customers which will eventually increase its revenues in the future.

Apart from these acquisitions, Ericsson is also expanding its business in Estonia through the nationwide expansion of its LTE network. 95% of Estonia is geographically covered by Ericsson’s LTE network and over 30% of its mobile-broad band subscribers have already opted for Ericsson’s LTE plan which shows the success of this service in this area.

The competitor’s approach

Cisco Systems (NASDAQ: CSCO) recently acquired JouleX, which deals in enterprise IT energy management for network-attached and data center assets. The acquisition complements Cisco’s existing portfolio and its capabilities. It will help the company in providing simple ways to measure, monitor and manage energy usage for the network and IT systems in organizations. JouleX Energy Manager decreases energy costs up to 60%. The Kyoto Protocol calls for a reduction in carbon dioxide emissions in most of the developed nations. Therefore, organizations are now highly inclined towards getting these energy management solutions. This increasing trend will significantly boost Cisco’s revenues after this acquisition.

Conclusion

Ericsson is finding new and better ways to attract customers and increase its revenues. Its growth in support solutions and TV industry is encouraging. The company’s profitability has improved by 26% YoY, which is driven by higher gross and operating margins. Its 3 year average revenue growth and net income growth is higher than the overall industry average.

The company is also trying to strengthen its market position in the LTE and TV industry. In Russia, the company has already secured two contracts from the largest operators there while its LTE network expansion plan in Estonia has also been very successful. With its latest acquisition of TeleOSS, it is expected that the company’s revenues from supporting system, the only segment in which the company is lagging behind, are also going to increase.

Therefore, it is anticipated that Ericsson’s profitability will continue to improve further due to the larger revenues and higher gross margins expected in the upcoming quarters. Its strategies will not only strengthen its relations with the customers but these moves will also make the investors happy. So, a buy recommendation is made for the stock.

Talking about Cisco’s acquisition, the company has taken a wise step as nowadays there is an increasing trend towards fulfilling corporate social responsibilities. Every organization is trying to make  customers happier by helping them meet these requirements. Moreover, the obligations imposed by Kyoto Protocol also bind the companies to fulfill these requirements. So, the acquisition of an energy management solution provider is definitely going to be beneficial for the company and the investors as well. So, I would make a buy recommendation for this stock too.


usman iftikhar has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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