Nokia Corporation (NOK) and Telefonaktiebolaget LM Ericsson (ERIC) are two prominent telecommunications and networking companies that operate worldwide. Based in Finland, NOK operates through its Mobile Networks, Network Infrastructure, Cloud and Network Services, and Nokia Technologies segments. Headquartered in Sweden, ERIC operates through four segments: Networks, Digital Services, Managed Services, and Emerging Business and Other.
The launch of a slew of 5G services and the implementation of mobile edge computing to cater to the increasing penetration of smartphones and Internet of Things (IoT) devices have boosted the growth of telecommunication providers NOK and ERIC. In fact, growing internet traffic amid a remote working culture has been driving higher demand for better networking technology and connectivity. So, we think NOK and ERIC are uniquely positioned to benefit from a sizable market opportunity over the long run.
NOK has gained 19.7% year-to-date, while ERIC has returned 15.4% over the same period. In terms of their past month’s performance, NOK is the clear winner with 17.3% gains versus ERIC’s 3.8% returns. But which of these stocks is a better pick now? Let’s find out.
Click here to checkout our 5G Industry Report for 2021
Latest Movements
Last month, NOK was selected by Telefonica Spain to provide 5G and Fiber-to-the-Home connectivity to more consumers and enterprises in Spain. NOK will upgrade the operator’s IP network. This deal will; allow NOK to deliver better services to end users for a better customer experience.
On April 22, NOK entered a partnership with Claro Chile to equip the new Gold Fields Salares Norte mine with a private wireless network. This will enable NOK to provide critical voice, data, internet and video communications to improve operational efficiency and productivity.
Last month, ERIC and ENCQOR 5G deployed a standalone end-to-end 5G network to r improve the latency and support the digital transformation of the Canadian economy. This standalone network will allow ERIC to deliver faster network connection and better user experience.
In March, ERIC was selected by Telenet as its 5G radio access network provider to deploy 5G connectivity across Belgium. This partnership will allow ERIC to deliver the expansive benefits of a high-performance network in Europe and thereby strengthen its position in the international market.
Recent Financial Results
During its first quarter ended March 31, NOK’s net sales increased 3% year-over-year to €5.08 billion, attributable primarily to strong growth in Network Infrastructure and in Mobile Networks. The company’s gross margin increased 260 basis points year-over-year to 37.9%. Its operating profit came in at €431 million, compared to an operating loss of €76 million in the first quarter of 2020. NOK’s EPS was €0.05, compared to a €0.02 loss per share in the prior-year quarter.
In the fourth quarter, ended March 31, ERIC’s network sales increased 15% year-over-year to SEK 49.8 billion. The company’s gross margin was 42.8% for this period, compared to 39.8% in the first quarter of 2020. Its net income rose 39% from its year-ago value to SEK 3.2 billion. ERIC’s EPS increased 48% year-over-year to SEK 0.96 over this period.
Past and Expected Financial Performance
NOK’s revenue has increased at a 7.9% CAGR over the past five years. In comparison, ERIC’s revenue declined at a 1.1% CAGR over this period. And the CAGR of NOK’s levered free cash flow has been 26.5% over the past three years. In comparison, ERIC’s levered free cash flow grew at a 0.4% annualized rate over the same period.
The Street expects NOK’s revenue to rise 4.2% in the current year, and 0.8% next year. The consensus EPS estimate indicates an 11.1% increase in 2022. Also, the company’s EPS is expected to grow at a 16.5% per annum rate over the next five years. In comparison, analysts expect ERIC’s revenue to increase 9.7% in its fiscal year 2021 and 4.8% in 2022. The company’s EPS is estimated to increase 15.9% in the current year and 17.8% next year. Also, its EPS is estimated to increase at a 13.9% per annum rate over the next five years.
Profitability
ERIC’s trailing-12-month revenue is 1.03 times NOK’s. ERIC is also more profitable, with a 41.2% gross profit margin versus NOK’s 39.9%.
However, NOK’s 13% levered free cash flow margin compares favorably with ERIC’s 10.7%.
Valuation
In terms of forward EV/Sales, ERIC is currently trading at 1.54x, 69.2% higher than NOK, which is currently trading at 0.91x. Also, its 11x trailing-12-month EV/EBITDA is 70% higher than NOK’s 6.47x.
ERIC is also more expensive both in terms of trailing-12-month Price/Book (4.43x versus 1.66x) and trailing-12-month Price/Cash flow (14.30x versus 7.78x).
So, NOK is cheaper than ERIC.
POWR Ratings
Both NOK and ERIC have an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
In terms of Growth Grade, NOK has an A, which is consistent with its earnings and revenue growth. In contrast, ERIC has a Growth Grade of C.
Also, in terms of Sentiment Grade, NOK has a B, given that analysts expect its EPS to increase in the current year. In comparison, ERIC has a C Sentiment Grade.
Both NOK and ERIC have an A grade for Value, in sync with their lower-than-industry P/E ratio.
Of the 54 stocks in the B-rated Technology – Communication/Networking industry, NOK is ranked #12, while ERIC is ranked #5.
Beyond what we’ve highlighted, our POWR Ratings system has also rated both NOK and ERIC for Quality, Stability, and Momentum. Get all NOK ratings here. Also, click here to see the additional POWR Ratings for ERIC.
The Winner
The advancement of wireless networks and implementation of 5G connectivity should keep bolstering the growth of network providers NOK and ERIC. However, NOK has an advantage here given its increased investments in network infrastructure and robust sales. In fact, its lower valuation and higher earnings estimates make it a more attractive investment compared to ERIC.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the top-rated stocks in the Technology – Communication/Networking industry.
Click here to checkout our 5G Industry Report for 2021
ERIC shares were trading at $13.39 per share on Tuesday morning, down $0.50 (-3.60%). Year-to-date, ERIC has gained 12.70%, versus a 10.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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