ERICSSON DCF MODEL & INTRINSIC VALUE

March 6, 2022 0 By bullheadedbear
Ericsson ERIC Logo DCF Analysis

Is Ericsson a good investment? What is Ericsson’s fair value / intrinsic value? Is Ericsson a buy at current valuations? These are the question we are trying to find out in the following fundamental analysis and discounted cash flow model.

The data used in the below analysis and dcf model comes from a combination of SharePad, Finbox, and the Ericsson investor relations website. Additionally, the dcf model uses personal assumptions, which are shared below.

Table of Contents

Ericsson Fundamental Analysis

Ericsson Discounted Cash Flow Modelling

Ericsson DCF Scenario Analysis

Ericsson DCF Summary

Ericsson Fundamental Analysis

Ericsson Income Statement

Please note that the financial data and models below are based on Ericsson’s base currency, SEK kr. We then convert kr to US dollar for the intrinsic value per share, which aligns with the trading currency.

Ericsson Year Income Statement

Ericsson Fundamental Analysis
Ericsson Income Statement
ERIC Income Statement
ERIC Income Statement

Ericsson Revenue vs Margin

Ericsson Fundamental AnalysisEricsson Income Statement
ERIC Income Statement
ERIC Income Statement

Following several years of growth, Ericsson’s revenue was flat between 2020 and 2021. EBITDA margin has continued to grow, finishing at 17.7% in 2021. Net income margin has also continued to increase, with 2021 net income margin being 9.9%.

Ericsson Balance Sheet

Ericsson Balance Sheet – 5 Year View

Ericsson Fundamental Analysis
Ericsson Balance Sheet
ERIC Balance Sheet
ERIC Balance Sheet

All areas of the balance sheet have increased over the years, except for non-current liabilities. Assets are up, with current assets significantly higher. Current assets increase is mainly driven by the rise in inventory, improved cash and cash equivalents, and increased investments. Liabilities are up due to increases in accounts payable and accrued expenses. Equity up significantly thanks to 67 billion kr retained earnings.

SharePad

Ericsson Cash Flow Statement

Ericsson Cash Flow Statement – 5 Year View

Ericsson Fundamental Analysis
Ericsson cash flow Statement
ERIC Cash Flow Statement
ERIC Cash Flow Statement

The cash balance at the end of 2021 was 57,704m kr, which is up from 2020. The increase in cash was predominantly driven by continued growth in cash from operations.

Ericsson Discounted Cash Flow Modelling

Ericsson DCF – Assumptions & Base Case FCF

Ericsson DCF Assumptions

 Tax Rate22.0%
 Discount Rate4.7%
 Perpetual Growth Rate0.5%
 EV/EBITDA Multiple6.5x
 Transaction Date03/03/2022
 Fiscal Year-End31/12/2022
 Current Price$8.07 (78.84kr)
 Shares Outstanding (m)3,334
 Debt (m)41,134kr
 Cash (m)69,701kr
 Capex (m)4,625kr
ERIC DCF Assumptions

In addition to the above assumptions, the below DCF model is based on our base case scenario, which assumes a revenue growth over the next five years of 2%, 2.5%, 2.5%, 2.5%, 2.5%. These assumptions are lower than the average analysts’ forecasts which average a 3% growth rate over the next five years. The comparisons between our bear case, base case & bull case scenarios are detailed later in this analysis.

ERIC Growth Forecast - Base Case
ERIC Growth Forecast (Base Case)

Ericsson Cash Flow Forecast – Base Case DCF Model

ERIC Cash Flow Forecast (Base Case)
ERIC Cash Flow Forecast (Base Case)

According to our model, free cash flow will decrease in 2022 to 23,814m kr, then gradually increase to 31,006m kr in 2026.

SharePad

Ericsson DCF – EBITDA Exit

Ericsson Terminal Value – EBITDA Exit

Final Forecast EBITDA (m)40,034kr
EV/EBITDA Multiple6.5x
TERMINAL VALUE (m)260,223kr
ERIC Terminal Value – EBITDA Exit

Ericsson Intrinsic Value – EBITDA Exit

 Enterprise Value (m)329,484kr
 Plus: Cash (m)69,701kr
 Less: Debt (m)41,134kr
 Equity Value (m)358,051kr
EQUITY VALUE / SHARE107.39kr
($11.00)
ERIC Intrinsic Value – EBITDA Exit

Ericsson Intrinsic Value vs Market Value- EBITDA Exit

ERIC Market vs Intrinsic (kr)
Ericsson Market vs Intrinsic (kr)
ERIC Market vs Intrinsic ($)
Ericsson Market vs Intrinsic ($)

Based on the model assumptions and using the EBITDA exit multiple of 6.5x, the intrinsic value for Ericsson is $11.00. Providing a potential upside of $2.92.

 Market Value$8.07
 Upside$2.92
 Intrinsic Value$11.00
ERIC Upside

Ericsson Investment – Internal Rate of Return (IRR)

 Target Price Upside36.2%
 Internal Rate of Return (IRR)13.8%
ERIC IRR
ERIC Stock Price vs IRR
ERIC Stock Price vs IRR

Based on the model assumptions and the current market share price of $8.07, there is an internal rate of return of 13.8%. If the stock price dropped 20% to $6.46, the IRR would be 21.4%. If the stock price increases 20% to $9.69, the IRR would be 8.3%

Finbox Get Started

Ericsson DCF – Perpetual Growth Rate

Ericsson Terminal Value – Perpetual Growth

Final Forecast FCFf (m)31,006kr
Perpetual Growth Rate0.5%
TERMINAL VALUE (m)744,591kr
ERIC Terminal Value – Perpetual Growth

Ericsson Intrinsic Value – Perpetual Growth

 Enterprise Value (m)717,702kr
 Plus: Cash (m)69,701kr
 Less: Debt (m)41,134kr
 Equity Value (m)746,269kr
EQUITY VALUE / SHARE223.84kr
($22.92)
ERIC Intrinsic Value – Perpetual Growth

Ericsson Intrinsic Value vs Market Value

Ericsson Market vs Intrinsic (kr)
Ericsson Market vs Intrinsic (kr)
Ericsson Market vs Intrinsic ($)
Ericsson Market vs Intrinsic ($)

Based on the model assumptions using the perpetual growth rate, the intrinsic value is $22.92, which is $14.85 higher than the current market value (at the time of analysis). Using the growth exit model, the intrinsic value is much larger than when using the EBITDA exit multiple.

 Market Value$8.07
 Upside$14.85
 Intrinsic Value$22.92
ERIC Upside – Perpetual Growth

Ericsson Investment – Internal Rate of Return (IRR)

 Target Price Upside184%
 Internal Rate of Return (IRR)35%
ERIC IRR – Perpetual Growth

Ericsson Stock Price vs Internal Rate of Return

ERIC Stock Prive vs IRR
ERIC Stock Prive vs IRR

Based on the model assumptions and the current market share price of $8.07, there is an internal rate of return of 35.2%. If the stock price dropped 20% to $6.46, the IRR would be 43.7%. If the stock price increases 20% to $9.69, the IRR would be 28.9%.

Ericsson DCF Model – Scenario Analysis

The above DCF model was for the base case scenario. Below is an overview of the bear case and bull case scenarios.

Ericsson DCF – Bear Case Scenario

Ericsson Revenue Growth Forecast – Bear Case

ERIC Bear Case Revenue Forecast
ERIC Bear Case Revenue Forecast

For the bear case scenario, we have set the revenue growth to be 1% for the next five years. The bear case represents slower growth than guided by management.

Ericsson Bear Case Free Cash Flow Forecast

ERIC Bear Case Free Cash Flow Forecast
ERIC Bear Case Free Cash Flow Forecast

Bear case free cash flow forecast starts at 24,261m kr in 2022, a significant drop from 2021. However, 1% annual growth sees a 2026 unlevered free cash flow increase to 29,760m kr.

Ericsson Intrinsic Value vs Market Value – Bear Case

ERIC Intrinsic Value vs Market Value - Bear Case
ERIC Intrinsic Value vs Market Value – Bear Case

The current market value is $8.07. For the bear case scenario, using the EBITDA exit multiple for terminal value, the intrinsic value is $10.54. Therefore, $2.46 higher than the current market value. If we use the perpetual growth rate for the terminal value, the intrinsic value is $22.15, which is $14.08 higher than the current market value. Again, the growth rate model provides a significantly higher intrinsic value than the EBITDA exit model for Ericsson.

Ericsson DCF – Bull Case Scenario

Ericsson Revenue Growth Forecast – Bull Case

ERIC Revenue Forecast - Bull Case
ERIC Revenue Forecast – Bull Case

The bull case has revenue growth of 3.5% annually for the next five years. This forecast is slightly above the average analysts’ forecasts.

Ericsson Bull Case Free Cash Flow Forecast

ERIC Free Cash Flow Forecast- Bull Case
ERIC Free Cash Flow Forecast- Bull Case

The bull case free cash flow forecast starts at 23,143m kr in 2022, which again is a drop from 2021. However, FCF then continues to increase to 32,108m KR in 2026.

Ericsson Intrinsic Value vs Market Value – Bull Case

ERIC Intrinsic Value vs Market Value - Bull Case
ERIC Intrinsic Value vs Market Value – Bull Case

The bull case EBITDA exit DCF model provides an intrinsic value of $11.39, which is $3.31 higher than the current market value. Using the perpetual growth rate DCF model, the intrinsic value is $23.61, which is $15.54 higher than the current market value.

Ericsson DCF Valuation Overview

ERIC Valuation Overview
ERIC Valuation Overview

Is Ericsson a good investment?
Is Ericsson a buy at current valuations?

The current stock price is at the lower end of the 52-week trading range and significantly below the analysts’ price targets.

All models returned an intrinsic value above the current market value. The DCF models using growth exit all show potential for tremendous upside.

As long as Ericsson executes on its plans and there are no other external factors impacting this, then Ericsson has the potential to deliver long term returns if investing at price levels around $8.00 – $9.00.

Subscribe for future posts

We do not give or sell your email address to anyone else, so you will not receive spam mail by subscribing to Bull Headed Bear. We hate spam mail as much as you!

Important Information

Disclaimer – Not Investment Advice

Information on this website/blog (https://bull-headed-bear.com/) is not investment advice or recommendations to buy or sell.

All information is the author’s views, opinions, and assumptions at the time of writing, and Bull Headed Bear makes no guarantees of the information’s reliability and accuracy. The information is to be used for entertainment and informative purposes only. Bull Headed Bear and its authors reserve the right to change their views, opinions and assumptions due to many influencing factors.

Any actions taken based on the information from this website are strictly at your own risk. All investments carry a risk of loss, and you could lose all your money. Consider seeking professional advice from a financial advisor. Bull Headed Bear and its authors will not be liable for any losses or damages from the information on this site.

By continuing to use our website, you are hereby consenting to our disclaimer and agree to its terms.

Disclosure

I/we have open long positions in Ericsson. We may increase this position depending on market movements over the coming weeks.

This analysis has been written by a Bull Headed Bear analyst/author for Bull-Headed-Bear.com. I/we receive no compensation for this post other than any payments received from ads or affiliate links.