Signify's Stock Price Could Explode Any Moment, But Risks Remain

|
About: Signify N.V. (PHPPY)
by: The European View
Summary

Signify is the world leader in lighting for professionals, consumers, and the Internet of Things.

Signify makes not only business in a growing market but also has even more growth potential due to its market position in Greater China.

Since the IPO, Signify has returned EUR 1.1 billion to its shareholders due to dividends and share buybacks.

A possible consolidation of the market could drive the share price up.

Overall, the stock price could explode any moment, but risks remain.

Introduction

This is another article about an uncovered or not that much covered stock here on Seeking Alpha: Signify (OTCPK:PHPPY). Like some of my other articles, the purpose is to give you a sufficient picture and insights on the current situation in as few words as possible.

(Image Source: Goethe web page)

In this article, I will provide you an overview of the company profile. After that, I will analyze the upsides and downsides of a possible investment in Allianz. I will pay particular attention to the market environment. While there are many growth opportunities for Signify, the highly fragmented market also poses high risks.

According to my three-grade rating, Signify is due to its enormous growth potential generally worth an investment, but the play is too risky for me at the moment.

The Company

Signify is the former Phillips Lighting, a spun off from Royal Phillips (OTCPK:RYLPF) (PHG) in 2016. With that, the company can look back on a 125-year history. During this time, Signify has pioneered lighting and has been the driving force behind many innovations.

Today, the company is the world leader in lighting for professionals, consumers and lighting for the Internet of Things. Its product portfolio includes incandescent lamps, LEDs, as well as electronic components, such as electronic ballasts and drivers. The Company also provides integrated and customized lighting systems. Its service portfolio includes light management and value-added services, such as energy audits, light design and engineering, as well as remote monitoring and managed services.

The Company operates through four segments:

  • Lamp segments (current profit engine but with declining sales)
  • LED segment (current growth engine)
  • Professional segment (lighting systems and services for professional consumers - current growth engine)
  • Home segments (consumer luminaries and home systems - current growth engine):

(Source: Product Portfolio)

The top 10 competitors are OSRAM (OTCPK), Acuity Brands (AYI), Hubbell (HUBB), ABB (ABB), Schneider Electric (OTCPK:SBGSF), Dialight (OTCPK:DIALF), Siemens (OTCPK:SIEGY), Eaton (ETN) and Brightgreen.

By comparison, Signify is more of a small and specialized company. This makes Signify more flexible, but nevertheless Signify lacks a financial backing by a large conglomerate. In this market environment, this is an important fact that I revisit later.

The Upsides

But first we come to the positive aspects of the business. Here are a few to name.

Brands

Signify owns well known brands like Philips and Philips hue:

(Source: Webpage)

But these are not just brands for certain light bulbs that are easily replaceable and substitutable. With these brands, Signify has its own ecosystem, where hard- and software is connected to each other. Take Philips Hue as an example:

(Source: Webpage)

Within this brand, Signify has a broad product portfolio. By connecting participants to each other, the company generates a high incentive to buy the products again and again.

Growing LED and industrial lighting market

There are two big opportunities for Signify's business:

  • The transition of the conventional market to LED
  • Smart cities / population growth / urbanization as a potential demand driver.

Firstly, it is expected, that the market will go from conventional lights to LED.

(Image Source: Study)

This means that especially conventional lights are replaced by LED. Fortunately, Signify has recognized this trend early enough and invested successfully in LED. In 2018, LED made 71% (in Q1 2019 LED made 73%) of the total sales:

(Source: Development of LED as % of sales)

Looking at growth geographically, the Asia-Pacific Region will hold according to a study a major share of the LED penetration:

(Image Source: Study)

China, for instance, followed a 5-year plan of phasing-out incandescent light bulbs over 100 watts starting 1st October 2012 and has gradually extended the ban to those over 15 watts on 1st October 2016.

Given that, in the LED market, Signify is a top player in Greater China but not the market leader:

(Source: Investor-presentation)

Therefore, Signify is not only active in a growing market, but can also gain some market share.

Secondly, smart cities / population growth / urbanization can be seen as a potential demand driver too. More and more people moving from rural regions to cities. And from this perspective, China seems to be a growth market too because the country still has a lot of urbanization potential:

(Source: Statista)

The fundamental development on the demand side of the market is therefore promising for the company and its investors.

Possible consolidation of the market

Furthermore, a possible consolidation of the market could drive the share price up. This is due to a highly competitive market without dominant players. Hence, the market concentration is pretty low:

Accordingly, the following possibilities would arise in a favorable course:

  • Signify grows through acquisitions.
  • Signify is bought.
  • Signify merges with a company of the same size.

In all cases, the stock price would rise. Therefore, potential investors can add a huge growth potential to their upside list.

Return to shareholders

Since the IPO, Signify has returned EUR 1.1 billion to its shareholders due to dividends and share buy backs:

(Source: Return to shareholders since IPO)

Furthermore, the dividend policy is quite attractive. The company targets a dividend pay-out ratio of 40% to 50% of net income. For 2019 the dividend yield was 5.24%. Since the IPO, the company pays rising dividends each year:

(Source: Annual results 2018)

Note, however, that - as is customary in European companies - the payment is made only once a year (usually in April or May) and not quarterly.

Next do dividends, Signify returns capital to its shareholders through share buybacks:

  • On June 4 2019, Signify started a share repurchase program of up to 240,000 shares. Signify will use the shares to cover obligations arising from its long-term incentive performance share plan and other employee share plans.
  • In July 2018, Signify started a share repurchase program to buy back up to EUR 230 million of its shares to reduce the company’s capital. The repurchased shares have been cancelled.
  • In May 2018, Signify repurchased 1.3 million shares for a total consideration of EUR 33.2 million to cover obligations arising from its long-term incentive performance share plan and other employee share plans.
  • In February 2018, Signify repurchased 2.2 million of its shares for an aggregate amount of EUR 71 million. These shares were cancelled in May 2018.
  • In 2017, Signify repurchased 9.8 million shares from Royal Philips for an aggregate amount of EUR 272 million. These shares were cancelled.

(Source: Webpage)

The Downsides

Given the enormous upsides, a few downsides have to be considered too.

The Outlook

Given that LED represents 71-73 % of sales and is supposedly growing on a comparable basis, the overall sales are declining rapidly.

(Source: Q1 2019 results)

This is due to the bad development of the cash & profit segment "lamps". In Q1 2019, sales in this segment amounted to EUR 309 million, a comparable decrease of 17.9%. Furthermore, the segment is expected to decline in the range of -21 to -24% on a comparable basis. That is less than the overall market, but it still hurts the earnings.

Hence, since the spun off from Royal Phillips the the share price performance was not that impressive:

(Source: Share price)

But in every risk is a chance. The company is regularly underestimated when it comes to the earnings. Earnings per share were now four quarters above estimates:

(Source: EPS surprise)

While this could indicate a slightly undervaluation, the company seems to be overall fair valued with an P/E ratio of 11.58. Despite all the great opportunities, the company has yet to prove that it will be one of the winners of market growth in the future.

Competitive Landscape - eat or be eaten

The industrial lighting market is highly fragmented. Overall, the competitive rivalry among existing competitors is high. This offers great opportunities as shown above but there is also the risk that Signify will leave the potential market consolidation phase as a loser.

Furthermore, Signify is only a little manufactures compared to OSRAM (OTCPK), ABB (ABB), Schneider Electric (OTCPK:SBGSF) and Siemens (OTCPK:SIEGY). All the blue chips might decide not to buy Signify but another company. In such a scenario, Signify would be exposed to a competition where it can not act on a par with. While this is of course a worst case scenario, it shows a possible outcome of this competitive market phase which would be not nice for investors. Therefore, a certain risk has to be taken into account.

Take away

After every analysis of a company, I will use a three-grade rating for this series. Its purpose is to ensure that readers recognize at first glance whether a company might or might not be worth investing.The three steps rating at a glance:

Buy the jewel rather now than tomorrow if:

  • There are no downsides and the company has growth potential.*
  • The upsides outweigh the downsides and the company has enormous growth potential.

Worth an investment (maybe later after a second look) if:

  • The upsides outweigh the downsides.
  • The upsides are equal to downsides but the company has growth potential.

No thanks if:

  • No growth potential in the long term.
  • The downsides outweigh the upsides.

*Of course, the growth potential is a part of the upsides, but it is also crucial in my final considerations.

The grade for Signify:

After all, Signify is generally worth an investment, but the play is too risky for me at the moment.

  • The stock price could explode any moment.
  • High growth potential.
  • Signify has to prove that it will remain as last man standing.
  • For riskier investors, there is a huge opportunity but for me, the downsides are there and for me they weigh too heavy.

If you enjoyed this article and wish to receive updates on my latest research, click "Follow" next to my name at the top of this article, and check "Get email alerts".

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.