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Philips Posts Better-Than-Expected Third-Quarter Profit; Target Price EUR 56 in Best Case

Philips, a leading European electrical engineering group, reported better-than-anticipated core earnings in the third quarter of this year as the COVID-19 pandemic boosted demand for hospital equipment with comparable sales rising 10% to 4.98 billion euros in the quarter.

Dutch health technology company said its income from continuing operations increased to EUR 341 million, compared to EUR 211 million in Q3 2019. Adjusted EBITA margin increased to 15.4% of sales, compared to 12.4% of sales in Q3 2019.

Philips said its third-quarter income from operations improved to EUR 476 million, compared to EUR 320 million in Q3 2019. EPS from continuing operations (diluted) amounted to EUR 0.37; Adjusted EPS increased to EUR 0.60, compared to EUR 0.46 in Q3 2019. Operating cash flow improved to EUR 770 million, compared to EUR 356 million in Q3 2019. The market consensus for core earnings was 630 million euros, on 4.82 billion euros of sales.

Philips forecasts average annual comparable sales growth of 5-6% and said next year its comparable sales will deliver low-single-digit growth, driven by solid growth in Diagnosis & Treatment and Personal Health. The company expects an Adjusted EBITA margin improvement of 60-80 basis points on average annually from 2021, reaching the high teens for the Group by 2025.

Philips shares traded closed 3.62% higher at EUR41.5 on Friday; the stock is down about 3% so far this year. At the time of writing, it was trading 1.3% higher at EUR 42.84.

Executive comments

“We are excited to continue our journey to create further value by improving growth and profitability, while recognizing that we are in very uncertain times, and with the assumption that the world economy will return to growth next year,” said CEO Frans van Houten.

“The new targets are underpinned by our strategic imperatives to further improve customer and operational excellence, boost growth in our core businesses through geographical expansion and more customer partnerships and win with innovative solutions along the health continuum. Our strategy to transform care along the health continuum – from healthy living and prevention to diagnosis and treatment, telehealth and home care – strongly resonates with customers and has been further validated during the COVID-19 pandemic.”

Philips stock forecast

Eleven analysts forecast the average price in 12 months at EUR 47.74 with a high forecast of EUR 56.00 and a low forecast of EUR 38.60. The average price target represents a 14.61% increase from the last price of EUR 41.65. From those 11 equity analysts, eight rated “Buy”, three rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of EUR 48 with a high of EUR 64 under a bull scenario and EUR 33 under the worst-case scenario. Koninklijke Philips has been given a EUR 47.50 price target by research analysts at Goldman Sachs Group. The brokerage presently has a “buy” rating on the stock.

Several other analysts have also recently commented on the stock. Barclays set a EUR 51 target price on shares of Koninklijke Philips and gave the company a “buy” rating. Sanford C. Bernstein set a EUR 52 price objective and gave the stock a “buy” rating. JPMorgan Chase & Co. set a EUR 38.60 price objective and gave the stock a “neutral” rating. Deutsche Bank set a EUR 54 price objective and gave the stock a “buy” rating.

Analyst Comments

“Order Book Momentum: acceleration in order book growth for the Connected Care business (Ventilators, Patient Monitoring) should offset COVID-19 related pressures in Personal Health; stabilising sales developments over the near term. Margin Recovery: Outsized orders in Connected Care should drive operational leverage, while cost management initiatives in Personal Health and Diagnosis & Treatment helps limit pressures on EBITA margin,” said Michael Jungling, equity analyst at Morgan Stanley.

“Valuation: we believe the company’s exposure to areas in high demand (i.e. Ventilators, Patient Monitoring, CT and X-Ray) puts the company in an attractive risk-reward positioning relative to other companies in our sector over the next 12 months.”

Upside and Downside Risks

Upside: 1) Product Launch Momentum: Momentum from on-going product launches and COVID-19 focused products drive topline growth and market share gains. 2) Online retail strategy: Growth in online consumer retail could accelerate organic growth, highlighted by Morgan Stanley.

Downside: 1) FX: EM currency volatility could be a source of headwinds on margins. 2) COVID-19: pressure on consumer and hospital budgets following a potential COVID-19 driven recession.

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