Ericsson undone by weak margins
Ericsson may have shown signs of bouncing back from a tough 2012 in the final quarter of the year, but the rebound hasn’t satisfied Moody’s Investors Service, which has downgraded the firm’s A3 rating.
The ratings firm dropped Ericsson’s outlook from stable to negative on the back of weak margins during 2012, and uncertainty over the company’s chances of improving profitability in the near term.
"Today's rating announcement primarily reflects our expectations that Ericsson's extended period of margin weakness will likely last well into 2013. Although we expect an improvement of operating margins in the second half of the year, the magnitude of the expected improvement is likely to be limited and leave Ericsson's ratings weakly positioned in the current category" says Roberto Pozzi, a Moody's vice president, senior analyst, and lead analyst for Ericsson.
Pozzi notes the A3 rating “assumes operating margins well above 10%,” – a figure Moody’s notes Ericsson has not achieved since 2008.
Ericsson’s margins are being sacrificed in favor of building market share in Europe, which it is achieving through low-margin infrastructure upgrade contracts. However, that focus is paying off – the firm enjoyed its fastest growth in sales in the space of a year during 4Q12 due to its focus on network upgrades.