Philips Earnings: New Restrictions Weigh on Sleep and Respiratory Business; Fair Value Down 16%

Narrow-moat Philips' shares were down 6% at the time of the writing as the firm has provided new details on the consent decree it agreed on with the U.S. Food and Drug Administration. The consent decree will prevent Philips from selling new respiratory devices in the United States for several years, although the exact timing is still uncertain. The firm can still sell consumables and replacement parts, and outside the U.S. it can still sell new devices if certain conditions are met. However, this is a big blow for Philips, given that the U.S. accounts for more than 50% of its sleep business under normal conditions. The firm has recorded an additional EUR 363 million provision from remediation activities and still faces uncertainty from litigation brought by patients. Although Philips' reputation in sleep and respiratory devices had already been severely hurt, we now believe it will be very difficult for the firm to ever recover its competitive position in this market. The new restrictions will curtail the growth profile of this business for several years. Sleep and respiratory revenue has declined from a record EUR 2.7 billion in 2020 to around EUR 1 billion today. We are lowering our sales and EBIT margin forecasts and reducing our fair value estimate to EUR 21 per share from EUR 25. Our Morningstar Uncertainty Rating is High.