Why Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC) stock is going gangbusters today

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Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC) stock surged over 12.5% on 17th July, 2020 (as of  9:55 am GMT-4 ; Source: Google finance) post the second quarter 2020 update along with positive outlook. The group’s maintained its financial targets for 2020 and 2022. Moreover, the firm also enhanced R&D investments in Digital Services to capture further business opportunities. However, this R&D spending along with lower sales, would cause a delay of some quarters in reaching the 2020 financial target. The firm’s 2022 operating margin target of 10-12% remains firm.

During the second quarter of 2020, the firm reported sales of SEK55.6 billion which is a rise of 2% on a yoy basis. The group improved their market position in Mainland China, winning contracts from all major players. The group’s gross margin rose to 37.6% during the second quarter of 2020 as compared to the same quarter last year. In segment Networks, Organic sales rose 4% driven by solid 5G sales in China, while Gross margin was 40.5%, which is after absorbing a large share of strategic contracts. Digital Services gross margin enhanced to 43.6% during the quarter as compared to 36.8% in the prior corresponding period, driven by rising portion of software sales. The segment digital services sales fell over 5% on a yoy basis. The segment managed services division’s Net sales lost 12% on a  YoY basis hurt by variable sales in a large contract in North America post the merger between two larger operators, and transfer of a contract from Ericsson to Ericsson Nikola Tesla d.d. (an associated company where Ericsson has a 49% ownership). Gross margin excluding restructuring charges rose to 17.2% as compared to 12.3%  against the same quarter in last year, driven by efficiency gains. In Emerging Business, sales fell by 4% hurt by lower sales in Red Bee Media.

The firm delivered a positive free cash flow before M&A for 8 consecutive quarters. The Free cash flow before M&A was SEK 3.2 billion while delivered a solid net cash position at SEK 37.5 billion. Moody’s upgraded Ericsson’s ratings to Ba1 with stable outlook.

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