Morgan Stanley recently released a preview report on LM Ericsson Telephone's (ERIC.US) Q3 2025 results, focusing on Q3 performance expectations, business adjustment impacts, and investment ratings. The Swedish telecom giant's Q3 financial report will be officially released on October 14, with the company currently facing a landscape of "market weakness coexisting with business resilience." Morgan Stanley maintains a "neutral" rating with a target price of 80.00 Swedish kronor (SEK).

From the market environment and core Q3 performance expectations perspective, overall market growth weakness continues, with telecom customers maintaining strict control over capital expenditure (capex), becoming the main pressure source for revenue growth. North America, as LM Ericsson Telephone's core market (accounting for 30-40% of revenue), is facing high base comparison pressure. The Q3 2024 AT&T contract delivery ramp-up boosted revenue in the same period, but Q3 2025 lacks new contracts of similar scale for support, potentially constraining regional revenue growth and pulling down overall Q3 sales (expected 56.108 billion SEK, down 9.2% year-over-year).

However, the mobile networks business emerges as a key highlight, with profit margin resilience exceeding expectations. Management guidance indicates gross margins of 48%-50%, representing a sequential improvement from Q2's baseline gross margin of 47%-48%, potentially becoming a "positive surprise" for Q3 results.

The iconectiv divestment transaction is the core event affecting Q3 results accounting. The transaction completed in mid-August 2025, with LM Ericsson Telephone recognizing approximately 9.9 billion SEK in divestment income and booking 7.6 billion SEK in one-time EBIT gains. This gain will be included in EBIT, EBITA and other core profitability metrics without separate breakdown to reflect underlying business trends. Driven by this, Q3 EBITA is expected to reach 13.8 billion SEK, significantly higher than Q2's 7.4 billion SEK. Post-divestment, the company's net cash position is expected to increase to 4.5 billion SEK, though management has not yet committed to special dividends or share buybacks, planning to defer cash return discussions until the full-year results release in January 2026.

Additionally, currency impact is expected to be similar to previous periods. Reviewing Q2 performance, currency fluctuations had an adverse impact on earnings. This quarter's currency impact is similar to Q2, with the Swedish krona (SEK) bringing slight negative effects while the euro (EUR) will provide slight positive support.

The financial model undergoes key adjustments due to the iconectiv divestment, as this business previously contributed approximately 4.0 billion SEK in annual revenue and 2.0 billion SEK in EBIT(A). Post-adjustment, 2025 performance is significantly improved by one-time gains: revenue is projected at 23.3 billion SEK (versus 24.8 billion SEK in 2024), EBIT expected at 3.0 billion SEK (versus 0.5 billion SEK in 2024), and earnings per share (EPS) projected at 7.10 SEK (compared to just 0.01 SEK in 2024).

From 2026 onwards, as iconectiv will no longer be included in consolidated statements, revenue, EBIT and other metrics will show mid-single-digit declines. 2026 EPS is expected at 5.94 SEK with revenue projected at 23.7 billion SEK.

Long-term, the company's gross margin shows a trend of "peaking in 2025 followed by slight decline," with 2025 adjusted gross margin at 47.2%, and 2026-2027 expected at 46.8% and 46.2% respectively. The dividend policy remains stable, with 2025-2027 dividends per share (DPS) projected at 3.00, 3.15, and 3.15 SEK respectively, representing dividend yields of 3.9%-4.1%, providing stable income support for investors.

The report also mentions LM Ericsson Telephone's concentrated global revenue distribution, with North America as the core market at approximately 30-40%. Excluding North America, Europe (excluding UK), India, and Japan each account for less than 10% of revenue, while the UK and Latin America account for 10%-20%. This high regional concentration may amplify the impact of single market volatility on overall performance.

In terms of valuation and scenario analysis, Morgan Stanley uses a 2026 expected EV/EBIT multiple of 8x to calculate the target share price, referencing 4G cycle levels as 5G capex has stabilized, consistent with 4G mature period valuation logic. The report sets three scenarios: In the bull case, if enterprise 5G cycles extend and North America RAN markets don't slow, the target price is 95.00 SEK (corresponding to 9.5x EV/EBIT). The base case represents current expectations with a target price of 80.00 SEK (corresponding to 8x EV/EBIT), assuming North America market stabilization and steady EBIT margins. In the bear case, if telecom capex declines rapidly and cash conversion deteriorates, the target price is 58.00 SEK (corresponding to 5.5x EV/EBIT).