ERICSSON DCF MODEL & INTRINSIC VALUE
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 Revenue vs Margin
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
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.
Ericsson Cash Flow Statement
Ericsson Cash Flow Statement – 5 Year View
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 Rate | 22.0% |
| Discount Rate | 4.7% |
| Perpetual Growth Rate | 0.5% |
| EV/EBITDA Multiple | 6.5x |
| Transaction Date | 03/03/2022 |
| Fiscal Year-End | 31/12/2022 |
| Current Price | $8.07 (78.84kr) |
| Shares Outstanding (m) | 3,334 |
| Debt (m) | 41,134kr |
| Cash (m) | 69,701kr |
| Capex (m) | 4,625kr |
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.
Ericsson Cash Flow Forecast – Base Case DCF Model
According to our model, free cash flow will decrease in 2022 to 23,814m kr, then gradually increase to 31,006m kr in 2026.
Ericsson DCF – EBITDA Exit
Ericsson Terminal Value – EBITDA Exit
| Final Forecast EBITDA (m) | 40,034kr |
| EV/EBITDA Multiple | 6.5x |
| TERMINAL VALUE (m) | 260,223kr |
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 / SHARE | 107.39kr ($11.00) |
Ericsson Intrinsic Value vs Market Value- EBITDA Exit
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 |
Ericsson Investment – Internal Rate of Return (IRR)
| Target Price Upside | 36.2% |
| Internal Rate of Return (IRR) | 13.8% |
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%
Ericsson DCF – Perpetual Growth Rate
Ericsson Terminal Value – Perpetual Growth
| Final Forecast FCFf (m) | 31,006kr |
| Perpetual Growth Rate | 0.5% |
| TERMINAL VALUE (m) | 744,591kr |
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 / SHARE | 223.84kr ($22.92) |
Ericsson Intrinsic Value vs Market Value
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 |
Ericsson Investment – Internal Rate of Return (IRR)
| Target Price Upside | 184% |
| Internal Rate of Return (IRR) | 35% |
Ericsson Stock Price vs Internal Rate of Return
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
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
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
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
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
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
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
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.
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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.