Philips can still shine despite a darker near-term outlook. The $30-billion health care, lighting and consumer electronics group had a miserable first quarter, forcing Chief Executive Frans van Houten to row back from hopes the company could beat 2013 earnings this year. The Dutch firm delivered zero revenue growth in the three months to March. Some of the company's slips look worse than others. It is poor that Philips had to close an imaging systems facility in January after US regulators rapped it for recalling health care scanners. That will knock euro 60-70 million off earnings before interest, tax and amortisation (Ebita) in 2014. Given imaging systems make up more than a third of sales at Philips' health care arm - its biggest by revenue - the reputational damage could linger.
It is unsettling to see the weakness in sales of lighting products, too. Philips reckons that more efficient light-emitting diodes will eventually more than offset the decline in conventional lighting. But though LED sales were up 37 per cent year-on-year, the division's overall revenue was flat. Less worrying was the weakness Philips encountered in emerging markets. Like many other European corporates, the Dutch firm found faster-growing economies fickle in the first quarter. The Ukraine crisis dented group sales in Russia. Chinese demand for lighting fell as the rate of new highway construction projects slowed.
But emerging market demand will probably return and innovations are likely to help. Philips is maintaining its spending on investment in research and development, once currency fluctuations are accounted for. Its euro 1.5-billion share buyback plan remains in place, too. Besides, Philips' 1.5 billion cost-cutting programme still has the better part of two years to run.
The company's strategy looks sound. Its healthcare division should in time tap into healthcare trends that will prompt governments and the private sector to offer cheaper services to aging patients at home rather than in hospitals. Meanwhile, Philips' consumer electronics arm is growing at a decent clip thanks to increasingly popular products such as air purifiers.
The shares slid five per cent on April 22. That is partly a measure of the disappointment at the update, but it is a function of the share price rating, too. At around 14 times forward earnings estimates, Philips' shares trade in line with the average for pan-European Stoxx 600 index. That is generous in the context of the uncertainties. But Philips' share price has nearly doubled in the last two years, as investors have bought into the van Houten recovery plan. And, on a longer view, the investment case still looks intact.
