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Why Credit Suisse Downgraded Ericsson

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Oct. 6 2017, Updated 4:36 p.m. ET

Stock downgraded

Recently, European investment bank Credit Suisse reduced its rating on Ericsson (ERIC) to “underperform” from “neutral.” According to Credit Suisse, Ericsson stock will fall to $4.67 over the next 12 months. Ericsson is currently trading at $5.60. The stock fell almost 3.0% from $5.76 after the downgrade.

Analysts expect Ericsson’s revenue to fall YoY (year-over-year) over the next three years. On average, analysts expect Ericsson’s revenue to fall more than 7.0% YoY in fiscal 2017. Credit Suisse has stated that the company’s revenue might fall more than the estimates.

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Negative profit margins in 2017

In 1Q17, Ericsson reported a GAAP (generally accepted accounting principles) loss. Operating and net profit margins are expected to be negative for 2017. Ericsson has been looking to sell off business segments that are no longer profitable in order to reduce the fall in profit margins. However, that could mean a further YoY fall in revenue that could drive ERIC stock lower.

Ericsson has a mid-term operating margin target of 12.4%. Credit Suisse believes that target is too optimistic. In fiscal 2015 when Ericsson was experiencing revenue growth, its operating margin was the highest in the last five years at 11.4%.

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