From vacuum cleaner to diagnostic medical equipment: Philips’ transition seems unhappily timed.

From vacuum cleaner to diagnostic medical equipment: Philips’ transition seems unhappily timed.

15 November 2021Reading time: 3 minutes

Philips has almost completed its transition from a specialist in household appliances to a medical technology group. At the end of March this year, Philips announced that it would book its household appliances business as a discontinued business from that moment on. The company from Eindhoven previously sold this division to the investment company Hillhouse Capital. This divestment was completed in the past quarter. This puts an end to a piece of Dutch nostalgia.

However, the new life as a medical device specialist could not have started more turbulently with the outbreak of the COVID-19 virus. In the past quarter, Philips was plagued by several setbacks. The subsequent profit warning therefore came as no surprise to most analysts and investors.

Revenue under pressure due to accumulation of setbacks

Philips achieved total sales of €4.2 billion in the third quarter. On a comparable basis, excluding revenue from the household appliances division, this represents a decrease of almost 8% compared to the same period last year. The profit for the third quarter came in at €3 billion but if we subtract the revenue from televisions and irons, the profit that remains is €442 million. However, this profit is a small improvement compared to the €340 million profit of last year.

Philips says it is mainly affected by shortages within the semiconductor industry, which makes the supply of medical equipment and parts more difficult. After all, a lot of chips are processed in this devices. The pressure on the supply of parts is not expected to improve this year.

Another major setback for Philips is the recall of respiratory support equipment, for example for the treatment of sleep apnea. The equipment would use a type of foam that has been shown to be harmful to patients' health. Philips has already had to set aside half a billion euros for the recall of these machines.

Due to the problems with the sleep apnea equipment, the medical technology group is also facing compensation claims. The outcome of these lawsuits could have a negative impact on Philips' share price, but it remains to be seen if it will come to that.

Philips has to lower its expectations

Although it came as no surprise, Philips was forced to lower its expectations for this entire year. Previously, the medical technology group had assumed a comparable sales growth of 5 to 6% per year. This has now been adjusted to 3 to 4%.

The improvement in the profit margin will also be slightly lower than what Philips had previously counted on. For next year, however, the company expects a strong order growth. CEO Frans van Houten has announced that this growth forms the basis for the profit recovery next year. For 2022, Philips expects one billion euro more comparable sales, which would be an increase of 5.5% compared to this difficult year.

The future price of the stock is subject to several political, industrial and sector specific as well as economic factors. Investors should consider these risks when making their investment decisions. Developments can be different at any time than investors anticipated on, which could result in capital losses.

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25/09/2022 19:15:24