Ericsson, Nokia, Alcatel-Lucent Are Buys With Little China Exposure: Bernstein

By Teresa Rivas

Markets have been rocked in recent weeks by worries about China’s economy as well as big swings in commodity prices and currencies. Yet plenty of good names are being sold off with the bad, creating an opportunity for investors.

That’s according to Bernstein’s Pierre Ferragu and his team, who today have a note out on the telecom equipment sector. They argue Ericsson (ERIC), Nokia (NOK) and Alcatel-Lucent(ALU), which are allo down around 10%, are oversold on these predominant fears, as all three companies have neutral exposure to China’s currency, limited exposure to China itself and no real exposure to the Chinese consumer.

In fact, Ferragu argues, all three have revenues with little correlation to gross domestic product; instead they are more late-cycle names, which gives them defensive characteristics.

Ferragu writes that from a broader perspective, he favors the Noka-Alcatel Lucent merger but reiterated Outperform ratings on all there stocks.

More detail from his note:

Ericsson is in our view the best positioned name to invest in Service Provider trends in our coverage. The company benefits from a strong scale advantage in Wireless, which is not reflected in the company’s profitability yet. We expect Ericsson’s margins to continue to expand in the coming years, justifying material upside to the stock price.

The Nokia– Alcatel-Lucent merger offers, in our view, a great long opportunity. The stocks trade today at 15 times what we consider a 50-cent “baseline” earnings, which corresponds to what the company would earn in 2015 assuming a full realisation of synergies. From this baseline we see a long list of potential upsides: revenue growth, margin expansion driven by the consolidation of the industry, cash return programme, increase in IP licensing revenues. A reasonable bull case, optimistic on all these fronts would drive in our view an EPS of 90 cents and 1 euro of free cash flow in 2019, which would yield a €13.5 stock price in 2018, or a ~25% return p.a. between now and then.

He has a $14.46 price target on Ericsson, a $10.35 price target on Nokia and a $5.69 price target on Alcatel Lucent.