EUR 850.00 For Business Accounts Only

Morningstar | Philips: Solid Results With Impressive Diagnosis & Treatment Order Intake in 2Q; Shares Undervalued

After correcting for negative foreign exchange movements, Philips reported solid second-quarter sales of EUR 4.3 billion (flat on a reported basis and up 4% year on year organically) and adjusted EBITA of EUR 482 million, or 11.2% of sales, compared with 10.2% in the year-ago quarter. As in previous quarters, Philips has met our expectations for margin improvement due to operational leverage and strong cost control. We maintain our narrow moat rating and our fair value estimate of EUR 42 per share for the Amsterdam-listed shares and $50 for the ADR. In our view, Philips remains one of the most attractive investment opportunities under our coverage.

We are happy with the results of Philips' second-largest division (close to 40% of group sales) as the diagnosis and treatment business' sales increased by 8% organically, fuelled by double-digit growth of high margin consumables Volcano IVF and Spectranetics catheters products and high-single-digit growth in ultrasound. The adjusted EBITA margin improved 180 basis points to 10.8%. Philips' refreshed product portfolio with new product launches--focused on increasing efficiency, data collection and sharing, and reducing harmful radiation doses for patients and doctors--has been well received by customers. Having reported firm demand for medical devices equipment and services in the first quarter (order growth of 10% year on year) Philips reported another quarter of eye-popping group order intake growth, especially for image-guided therapy solutions in China and North America, of 9% in the second quarter.

Sales in the personal health business, Philips growth engine the past couple of years, came in slightly below our expectations, with comparable sales growth of 2%. High-single-digit growth in sleep and respiratory care and low-single-digit growth in personal care were partly offset by a high-single-digit comparable sales decline in China, driven by lower demand in the air purification market. Positively, demand for personal health products picked up during the quarter, and on the back of operational improvements, adjusted EBITA margins increased by 80 basis points.

In our five-year forecast for Philips, we foresee increasing recurring revenue and EBITA margin expansion by on average 80 basis points per year, owing to increasing maintenance support for medical devices, growing monthly fees from partnerships with hospitals, additional sales of software licenses, and increasing use of high-margin catheters products. In this respect, we are very happy with Philips' second-quarter performance, as the firm signed another seven long-term strategic partnership agreements, including a seven-year contract for diagnostic imaging systems with Cardiac Care Center in Ethiopia and two contract wins in the backyard of Philips' competitor Siemens (medical imaging solutions in Cologne and Munich).