Philips Earnings: Stock Rises 11% After Beating Consensus; Diagnostics and Treatment the Outlier

Narrow-moat Philips PHIA reported a very strong first-quarter performance that exceeded company-compiled consensus. Philips achieved adjusted EBITA of EUR 359 million, equivalent to an 8.6% margin, a significant improvement from 6.2% in the same period last year and also compared with previous years. Margin expansion was primarily driven by robust organic sales growth of 6% year over year, which resulted in operating leverage and productivity enhancements that resulted in total savings of EUR 190 million and supply chain improvements that enabled double-digit growth in diagnostics and treatment. We are pleased with Philips’ cost-cutting efforts; the company has already laid off 5,400 workers out of its target of 10,000. On the supply chain front, we believe easing will come from overall global improvements rather than company-specific action as Philips has struggled with supply chain management for years. We maintain our EUR 25 fair value estimate.

Despite impressive first-quarter results, Philips’ management did not revise their annual outlook, which we consider a prudent move given their historically poor track record in setting guidance. Therefore, we support management’s conservatism in this regard, with our projections aligned with 2023 guidance. Income from operations was negative EUR 583 million, primarily due to EUR 575 million provisions for accelerated restructuring and litigation costs relating to the Philips Respironics recall. We believe the stock price surged by 11% as a response to the expansion in margins, double-digit order intake growth in diagnostics and treatment, and successful cost-reduction measures. At current levels shares still offer 30% upside.