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Not quite what the doctor ordered. Philips's healthcare business, which ranges from patient monitors to scanners, caught a chill in the first quarter. Sales at €2.1-billion ($2.8-billion) dipped 1 per cent year-on-year, but orders were down 5 per cent, suggesting that recovery will not occur overnight. Problems are most severe in the U.S., where there is a new medical devices tax and other funding changes. This is hardly a bolt from the blue: Philips cautioned last month that it sees the U.S. market flat in 2013, with hospitals deferring capital spending. Even so, the news spoiled generally respectable results on Monday. Philips shares, which gained over 70 per cent in the 15 months to mid-January but have trod water since, fell 5 per cent.
How much should investors worry? Philips's story has been more about bottom-line profits than top-line sales recently, as confidence in a big, cost-focused overhaul has risen. On that front, chief executive Frans van Houten is recommitting to Philips's 2013 targets, which include a 10-12 per cent improvement in earnings before interest, tax and amortisation. That does not look unrealistic, in spite of the fall in first quarter reported ebita to €400-million, from €450-million a year ago. Strip out one-offs, and there was a 30 per cent improvement in group profitability, with the group ebita margin rising to 8 per cent, up from 6.1 per cent a year ago.
Moreover, Philips's €1.1-billion cost reduction program is only at its halfway stage. By the first quarter of 2013, €550-million of cumulative gross savings had been achieved, and the aim is to get to €900-million by end-2013. Philips, moreover, sits on well-placed brand portfolio – nicely exposed to aging populations, energy efficiency and emerging markets. Its shares now trade on a 13 times forward earnings multiple, a modest discount to the capital goods sector generally. Top-line worries may persist, but the stock does not deserve to flatline.