Morningstar | Philips Company Report
After deconsolidation of the sluggishly growing no-moat lighting division, the breakup of Philips is largely completed, and the firm's profile is more appealing for investors, given higher sales growth and improved profitability. With strong intangible assets and increasing switching costs as the foundations of Philips' healthtech moat, the firm's returns on invested capital are on the rise and substantially outweigh its cost of capital. Philips' product suites tie well into growing demand for integral value-based healthcare solutions and the ageing population with more chronic diseases. The firm is successfully navigating the challenges of increasingly bundled purchasing behavior by shifting to a "continued engagement" model from a transactional model, which should also alleviate concerns regarding increasing pricing pressure. Philips’ broad product offering and strong distribution channel are gaining in importance in a world where big buyers increasingly partner with large providers of medical equipment and services. Due to additional partnership contract wins, increasing annual software licensing, and sales of reagents/consumables, we expect recurring revenue within the sales mix to increase to 35% in 2021 from approximately 26% currently.Philips' personal health segment's high growth rate is sustainable, in our view, as the firm focuses on powered toothbrushes and electronic shaving devices, which are less competitive high-end segments with brand loyalty, while the low-end segments of manual shaving and tooth-brushing are more commoditised and price-driven markets.In November 2017, the firm reduced its stake in Philips Lighting's share capital to 29%. We expect it to sell the remaining shares during the next few years, raising funds for capital allocations such as share buybacks and investments. Going forward, we expect the firm’s merger and acquisition activity to be focused on small bolt-on acquisitions within the healthcare product and services domain.
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