Philips Undervalued Ahead Of Normalizing Procedures And Telehealth Growth

Summary

• Philips beat fourth quarter expectations, with the strong performance of Connected Care driving the business.
• 2020 was a challenging year for hospital capital equipment outside of respiratory care and monitoring, but Philips gained share in MRI and CT.
• Telehealth and image-guided therapies, two areas of particular focus at Philips, are likely to outgrow the broader med-tech market over the next decade.
• Philps looks undervalued on the basis of 7% long-term FCF growth and near-term EBITDA margins in the 18%-19% range.

Helped in part by the company’s significant ventilator and monitoring assets, Philips (NYSE:PHG) has performed better than many peers through the pandemic, as sales of those types of medical equipment have offset weaker “big iron” imaging system sales and lower procedure-driven revenue. Looking ahead, the eventual run-off of the pandemic will create tougher comps, but procedure and imaging sales should grow, and Philips is well-leveraged to long-term trends in telehealth.

Philips shares are up another 15% or so from the time of my last update, outperforming the broader med-tech space and peers like Medtronic (MDT), though Siemens Healthineers (OTCPK:SMMNY) has done even better over that short period of time. I still believe these shares offer worthwhile upside, with longer-term efforts to grow telehealth and boost operating margins offering some upside to growth rates.

A Respectable Quarter

Philips had an above-average quarter relative to other med-techs, helped by the company’s leverage to areas like respiratory care/support and monitoring.

Revenue rose about 7% in organic terms (to EUR 6B), modestly beating expectations. Connected Care (or CC) drove the outperformance, with sales up 24% (to EUR 1.6B) and 7% ahead of expectations. Diagnostics and Treatment (or D&T) saw 1% revenue growth to EUR 2.5B, missing slightly. Personal Health (or PH) reported 5% revenue growth to EUR 1.8B, a slight beat.

Adjusted EBITA rose 7% to EUR 1.1B, beating expectations by about 2% with a 110bp YoY margin improvement. By segment, D&T earnings fell 18%, with margin down 230bp to 14%, CC profits rose 64% (margin up 780bp to 27.2%), and PH profits fell 2% (with margin down 10% to 20%). Operating income rose 9% to EUR 0.8B, with margin up 100bp to 13.2%.

D&T – Waiting For A More Normal Environment

D&T revenue was just barely positive over last year, with imaging equipment sales

Analyst’s Disclosure:I am/we are long ARAY. 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.