Hitt og þetta 21. apríl 2006

DJ THE SKEPTIC: Gravity Tugs At Ericsson

LONDON (Dow Jones)--Gravity has at last caught up with Ericsson.

Under the guiding hand of Carl-Henric Svanberg the Swedish telecom equipment vendor has managed a creditable turnaround from the days when it seemed entirely possible it would be crushed under the weight of its own excess and the bursting of the 'net bubble.

The push has lasted longer than many thought likely, along the way lifting its shares from lows in September 2002 of SEK3.37 to recent levels around SEK27-SEK30.

But Ericsson has now hit a wall of sorts.

Sales in the first quarter advanced strongly, up 25% on the year at SEK39.2 billion, but profitability waned net profit eased 0.9% to SEK4.58 billion, significantly below consensus expectations.

The key drag was Ericsson's own doing, the dubious SEK19 billion ($2.6 billion) acquisition of the bulk of ailing U.K. equipment firm Marconi's assets earlier this year. Marconi itself turned in an operating loss for the quarter of SEK600 million.

Perhaps as worrisome, though, was Svanberg's admission that intensified competition also helped knock a "percentage point or two" off the company's operating margin, which fell to 16.9% from a healthy 21% a year ago. New services contracts with lighter margins contributed to the weakened result.

Svanberg is maintaining a forecast of moderate growth in the global systems market this year. But based on numbers in recent days from rivals Nokia and Motorola, and Ericsson's own experience in the first quarter, any growth achieved is likely to contribute less to profits than during Ericsson's runup to date.

Of course, there's are reasons to be optimistic, particularly if Ericsson shares dip to more realistic levels.

Ericsson acquired Marconi to bolster its presence in the fixed-line networks market. Should the as-yet untested premise of convergence, particularly the further integration of broadband into telcos' repertoires, prove a success, then the purchase will look smart.

And betting against Svanberg managing to get momentum back into Ericsson after this stumble probably isn't wise, even if investors should be scaling back expectations.

That Ericsson remains the dominant vendor, and that its sales advanced strongly and rose across all its regions, is comforting - but the tightening margins are a clear sign that Ericsson can't keep rising forever.