Ericsson has a more reasonable valuation
Ericsson (ADR) (NASDAQ:ERIC) is much cheaper than the other two companies. The company has a much more diversified business than both Ruckus Wireless and Aruba Networks. Ericsson (ADR) (NASDAQ:ERIC) has three main business areas: Networks, Global Services, and Support Solutions, serving customers in more than 180 countries worldwide.
The Networks segment contributed the majority of sales, SEK 117.2 ($17.89) billion, or nearly 51.5% of the total revenue. It is also a big operating profit contributor, with more than SEK 7 billion ($1.07) in operating income in 2012. Recently, the company decided to divest its power cable business to NKT Cables for around SEK 250 ($38.17) million. The company estimated that this divestment transaction would create a loss of SEK 100 ($15.27) million and affect negatively its 2013 third-quarter earnings results, especially the Networks segment. Ericsson is trading at $12.30 per share on the market, with a total market cap of $39.7 billion. The market values the company quite reasonably at 8.15 times EV/EBITDA.
My Foolish take
With an extremely high valuation, Ruckus Wireless Inc (NYSE:RKUS) offers investors nearly no margin of safety. Consequently, a small glitch in its business might cause the significant drop in its stock price. I expect Ruckus Wireless’ valuation to contract further in the near future. The same applies for Aruba Networks, Inc. (NASDAQ:ARUN). Personally, I would consider both companies to be too hot to touch. Ericsson (ADR) (NASDAQ:ERIC), with its global presence, more diversified business segment and reasonable valuation, would be a much better pick among the three.
The article This Wi-Fi Solutions Provider Is Too Hot to Touch originally appeared on Fool.com and is written by Anh Hoang.
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