Philips Earnings: Strong Profit Offset by Decline in Orders; Maintain Our EUR 25 Fair Value Estimate

Narrow-moat Philips reported healthy 11% organic sales growth in the third quarter, supported by higher pricing, which contributed to an EBITA margin expansion of 540 basis points to 10.2% of sales. Shares are down 2% at the time of the writing though, as strong earnings were offset by a 9% decline in order intake, which created uncertainty. The largest decline in orders was in the diagnosis and treatment division, which sells expensive magnetic resonance and computer tomography machines. Hospitals tend to defer purchasing decisions on these machines in times of economic weakness, creating some cyclical swings in demand. We believe investors in Philips can see a bumpy road in the following quarters due to macroeconomic uncertainties, swings in demand, or changes in the supply chain. However, we still see shares as undervalued and maintain our EUR 25 fair value estimate. However, investors might need patience until the gap between the share price and our fair value estimate converges.

The diagnostic and treatment division had the strongest growth (14%) thanks to strong demand and an easy comparable figure. The order intake was weaker though, declining by double digits. The personal health division also had a strong performance, with 7% organic growth and an 18.7% EBITA margin. We expect a strong performance from the personal health segment during the last quarter of 2023 as it should benefit from higher promotional activity during Black Friday and Christmas. In connected care, growth of 10% was driven by the monitoring and informatics division. In the respiratory subsegment, Philips has already remedied issues with 99% of respiratory devices and continues to fix ventilators.