Philips - Equity Case Study

Philips Case Study

1. Positive Impacts & potential change in company profile

• Thanks to the creation of 2 separated companies, they could be more focused and have a lean management structure. Accelerate (restructuring program) is a success : 60% completion at the moment structural restructuring charges are lower than forecasted which offsets the net income cut due to AVM disposal and lower licensing contribution (EPS is still in line)
• Philips has a high ability to growth inorganically and is prepared for it (has completed 75% of its share buyback program) ; however bad rating by S&P and Moody + has a bad track record and buying acquisitions x22 its EBIT
• Philips may have a considerable scale advantage in Lightning (with sales twice as large as the N2) but it’s not visible in the EBIT% since the restructuring program is lowering the figures. In addition, the industry is in the midst of a technological shift ; Philips seems to be leading the path with a +- 25% growth in Q3 2012 (higher than its competitors) in the led sector) – Lightning being a highly-guarded strategic section of Philips
• In the rest of the portfolio ; Philips Consumer Well Being holds a niche leadership positions in some specific products (hard to assess the historical performance since it was entangled with the rest of Philips consumer electronics portfolio) but growth of 5-6% over the last 5 years = exceeding expectations. This type of growth is due to product innovation and geographical footprint (emerging countries new markets)
• AVM disposal is a good news, because they had a negative WC structure
• Increasing expenditures in R&D, from 1.3% of sales in 2010 to 2.4% in 2012, it is developing many new products, especially in the value segment. Because the growth is heavily dependent on product innovation in mature segments.
• Master and acquisition refocus; it has completed 75% of its share buy-back program but management wants to be focused on savings program. Mergers and Acquisitions is an area where a track records needs

to be built.

1. Potential sources of improving profitability that could generate earnings/cash flow growth.

• Cost savings of 100M in 2015 and 200M in 2016, thanks to the establishment of the 2 companies.
• The objectives communicated to the market (CAGR >4%, reported EBITA >10%, Group ROIC >12%) urges the 500 top managers to achieve these goals ; with bonus payouts (“retention of talent”)
• Many opportunities to spend cash and make investments
• The program has beaten expectations 6 quarters in a row (organic growth and EBITA), now it starts to slow down. Philips has a boom-to-bust program which means innovation -> growth -> pause -> innovation -> growth ->…

1. Valuation of  Philips which provide support

Exane Raised their target price from 22.5 € to 24.5 €, the current price is 24€, thanks to the change in Portfolio. The Portfolio is now more concentrated. Also thanks to disposal of AVM, it leads to a reduction of structural recurring restructuring charges.