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Philips Pumps Up Profitability

We’re raising our fair value estimate after strong first-quarter results.

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 Philips (PHG)/(PHIA) reported good first-quarter sales of EUR 5.7 billion, up 4% on a reported basis and 2% on a comparable basis, along with adjusted EBITA of EUR 437 million, or 7.7% of sales, compared with 6.8% in the year-ago quarter. Revenue was roughly in line with our expectations, and we are encouraged by the 3% organic growth in the quarter. The narrow-moat firm has exceeded our expectations for margin improvement, thanks to operational leverage and strong cost control.

After adjusting our 2017 and 2018 revenue and margin expectations and taking into account the time value of money, we have increased our fair value estimate to $39/EUR 36 from $35/EUR 32. For 2017, we expect modest sales growth (3.2% versus 2.9% previously) and increasing adjusted EBITA margins (11.5% versus 11.1% previously) as a result of operational performance improvements, mainly in the healthcare segment, and benefiting from progress in ramping up production and shipments from the U.S. Cleveland manufacturing facility. We are happy with another strong quarter of margin improvement, and we believe Philips remains one of the most attractive investment opportunities under our coverage.

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Jeffrey Vonk does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.