On Jan 9, we maintained our Neutral recommendation on Koninklijke Philips Electronics N.V. (PHG). We are concerned about the ongoing global economic uncertainty and the strong competition faced by the company. However, Philips has reported profits in three consecutive quarters, and the cost reduction plans as well as product launches are further benefiting the company’s growth strategy.
Moreover, the LED lighting segment is one of the growth stimulants of the company, contributing about 33% of the total lighting sales.
Why the Reiteration?
On Oct 23, Philips reported net income of €281 million ($372.2 million) in the third quarter of 2013, up 167.6% from the prior-year quarter. The year-over-year growth was primarily due to overall improvement in operating results and lower restructuring and acquisition-related charges. In addition, project Accelerate has also been a driving force impelling the robust increase in income.
Philips reported third-quarter earnings of €0.31 (41 cents), reflecting a substantial 181.8% year-over-year increase.
Third quarter sales on a comparable basis grew 3% year over year to €5.6 billion ($7.4 billion). However, group nominal sales declined 3% year over year due to 6% impact from unfavourable currency translations.
Following the release of the third-quarter results, the Zacks Consensus Estimate for earnings for fiscal 2013 increased 4.7% to $1.80 per share, while the same for fiscal 2014 inched up 0.5% to $2.18 a share.
Philips is all set to benefit from the rapid adoptionof LED-based lighting solutions across the globe. In the last reported quarter, LED sales grew 30% year over year and represented 33% of the total lighting sales. Philips is currently the market leader in LED-based lighting solutions.
In addition, Phillips implemented a comprehensive performance improvement and change program called Accelerate to realize the value potential of the company and speed up growth. In addition, the company has launched key initiatives to implement the Philips Business System, which includes a €500 million cost reduction program that is expected to be accretive to margins from 2013.
However, global economic uncertainty is expected to impact all business segments of the company. Further, the healthcare construction is expected to decline 2% in 2013. The patient procedure volume growth expectation also remained flat in the low single-digit range.
Currently, Philips carries a Zacks Rank #3 (Hold). Investors interested in the electronics sector can consider better-ranked stocks like Acorn Energy Inc. (ACFN), Daktronics Inc. (DAKT) and GrafTech International (GTI). All three stocks carry a Zacks Rank #2 (Buy).
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