Philips Earnings: Firm Reaches $1.1 Billion Settlement Agreement

Key Morningstar Metrics for Koninklijke Philips

• Fair Value Estimate: $23.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Koninklijke Philips’ Earnings

Koninklijke Philips’ PHG shares jumped 30% in early-morning trading after the firm reached a $1.1 billion agreement to settle litigation in the United States concerning economic loss, personal injury, and medical monitoring related to its sleep therapy devices. The stock market liked the news, as many investors expected a higher settlement amount.

This agreement ends much of Philips’ litigation uncertainty, as most cases were related to sleep apnea patients. The company also admitted no fault or liability and did not have to acknowledge whether the devices caused any injuries. Management estimates most of the claimants have already submitted a claim, given the long period since the recall was initiated and the case has been advertised for three years.

Philips still needs to be investigated by the Department of Justice (which management did not comment on) and reach an agreement over ventilation devices. There are far fewer patients affected there than by sleep devices. We have maintained our fair value estimate after adjusting our forecasts, since the settlement amount was aligned with our estimates.

Despite the good news, Philips faces long-term headwinds and reputational damage from this issue, which we think will result in a permanent loss of market share to ResMed RMD. Although Philips is still allowed to service existing sleep apnea devices, the multiyear consent decree prevents it from selling new devices for several years, while ResMed will keep hold of most of the market and continue to invest in research and development. We believe ResMed’s sleep apnea machines will be the preferred solution for doctors and patients in the long term.

The diagnostics and treatment division grew sales by 3% organically on a strong comparable basis. Personal health also grew by 3%, supported by mid-single-digit growth in Europe. Connected care sales declined by 1%.