Philips Earnings: Beats Expectations and Lifts 2023 Outlook, but Uncertainty Weighs on Shares

Narrow-moat Philips PHIA beat company-provided consensus expectations for the second quarter and also raised its financial outlook for the full year. The company achieved a 9% organic growth rate driven by all segments and geographies. The strongest contributor was the diagnostics and treatment division (almost 50% of revenue), which reached 12% organic growth thanks to ultrasound and image-guided therapy devices. In the personal health division, sales grew 3% organically with a 13.4% EBITA margin, up 100 basis points year over year.

Philips also did better than expected on the profitability side, booking EUR 453 million in adjusted EBITA for a 10.1% margin (versus consensus of EUR 394 million). Sales growth, a favorable product mix, and an improvement in global supply chains helped EBITA margin expand almost 500 basis points year over year. Management lifted its guidance and now expects sales growth in the midsingle digits for the full year (up from low single digits) and EBITA margin of close to 10%. We are not surprised by this, as Philips had already recorded a strong start to the year in the first quarter. We are maintaining our EUR 25 fair value estimate.

Despite the beat, the shares are down around 5% at the time of the writing. We believe this is explained by the uncertainties the company still faces. First, Philips is facing lawsuits in many countries after the product recall in its Respironics division, and the amount of money it will have to pay is still uncertain; it recorded a EUR 575 million provision in the first quarter. Second, the company’s second-quarter results benefited from improved supply chain conditions after problems on this front, but we believe this is explained by a general improvement in the situation rather than by any Philips-specific actions.