Presented by Gavin Yates and Michael O’Sullivan
Industrials Sector Manager: Rory McDonagh
Date: January 20th 2011
Company Description Share Price Performance LTM
Koninklijke Philips Electronics N.V. is the parent company of the Philips
Group. Philips' activities in the field of health and well-being are
organized on a sector basis, which includes Healthcare, Consumer
Lifestyle and Lighting.
The Group Management & Services sector provides the operating sectors
with support through shared service centers.
As of December 31, 2009, Philips had 127 production sites in 29
countries, and sales and service outlets in approximately 100 countries.
In 2009, the Company underwent a significant strategy revision stripping
down operations and refocusing the cash generation and cost
management resulting in free cash flow increases of 11%, despite difficult
The Company will continue to make strategic acquisitions throughout
2011 Jan/10 Mar/10 May/10 Jul/10 Sep/10 Nov/10
Source: Worldscope Source: Reuters
Key Financials & Recent Acquisitions Revenue Breakdown by Segment and Region
Price (€) 24.70 P/E 12.6
Market Cap (€) 24.47bn P/E 2012 11.2
29% Emerging Markets 30%
52 week range (€) 27.01/20.34 Dividend Yield 3.10% 34% Lighting 36%
Beta 1.12 Consumer Lifestyle
Date Target Segment Western Europe 5%
Dec 2010 NCW Holdings Ltd. Lighting 37%
Oct 2010 Discus Dental Consumer Lifestyle
Sep 2010 Wheb Sistemas Healthcare Emerging Markets
Aug 2010 Burton Medical Products Corp. Lighting Consumer Lifestyle Other mature 36%
Healthcare North America
Jul 2010 Shanghai Apex Electronics Healthcare
Feb 2010 Luceplan SpA Lighting
Source: Reuters, Bloomberg Source: Annual Report
The Business Lighting
Philips Electronics is a diversified Health and Well- Philips is the world’s leader in Lighting. Philips
being company, focused on improving people’s lives provides advanced energy-efficient solutions for all
through timely innovations. As a world leader in segments: road lighting, office & industrial,
healthcare, lifestyle and lighting, Philips integrates hospitality and home - and has been instrumental in
technologies and design into people-centric solutions, enhancing sustainability through innovations in
based on fundamental customer insights and the brand promise of lighting technology.
“sense and simplicity”. Philips is also a leader in shaping the future with exciting new lighting
Philips employs approximately 118,000 employees in more than 60 applications and technologies such as LED technology. Philips
countries worldwide. With sales of €23 billion in 2009, the company Lighting employs approximately 51,000 people worldwide.
is a market leader in cardiac care, acute care and home healthcare, Philips is number one in lamps in Europe, Latin America and Asia
energy efficient lighting solutions and new lighting applications, as Pacific and number two in North America; in Automotive lighting,
well as lifestyle products for personal well-being and pleasure with and are leading in Europe, Latin America, Japan and Asia Pacific.
strong leadership positions in flat –screen TV, male shaving and 2009 Highlights
grooming, portable entertainment and oral healthcare. Sales: €6.5bn 2.2% EBITA €591m cash flows before financing
Healthcare Consumer Lifestyle
Philips simplifies healthcare by focusing on the people Guided by the brand promise of “sense and simplicity”
in the care cycle – patients and care providers. and the consumer insights, Philips Consumer Lifestyle
Through combining human insights and clinical offers rich, new consumer experiences that meet
expertise, Philips aim to improve patient outcomes consumers’ desire for relaxation and improving their
while lowering the burden on the healthcare system. state of mind. Philips also responds to the consumer's
Advanced healthcare solutions are a fundamental part of the desire for wellness and pleasure by introducing products that meet
portfolio for both healthcare professionals and consumers, to meet the individual’s interests in terms of their body and appearance.
the needs of patients in hospitals and at home. Philips Healthcare Philips Consumer Lifestyle employs approximately 18,400 people
employs approximately 34,000 people worldwide. worldwide.
Philips is the world’s largest home healthcare company, being Philips is number one in the electric shavers and male grooming
number one in: Monitoring systems, Automated External category globally.
Defibrillators, Cardiac Ultrasound, Cardiovascular X-ray. Philips is one of the leading flat-TV brands globally.
2009 Highlights 2009 Highlights
Sales: €7.8bn 10.8% EBITA €876m cash flows before financing Sales: €8.5bn 4% EBITA €587m cash flows before financing
• Established global leader in Healthcare, Consumer Lifestyle • Inefficient use of capital and balance sheet – over
and Lighting goods capitalised (net cash position)
• Global footprint – Sales and service outlets in over 100 • Business sub-optimally structured – cyclical Consumer
countries with 127 production sites Lifestyle and Lighting could potentially be spun off from
• Very strong exposure to emerging market growth – 32% of defensive Healthcare
revenues • Philips has not demonstrated itself to be a growth
• Very strong balance sheet – free cash flow of €1.5bn (after company in the past and this legacy could be somewhat
dividend) and forecasted €800m net cash position for 2010 difficult to overcome
• 2008/09 business restructuring led to a streamlined business, • Big exposure to staid healthcare markets, particularly in
increasing free cash flow by 3.7% and productivity by 5.6% the US. Despite high margins, top-line growth expected
to be difficult in coming years.
• Strong EM exposure, particularly Brazil, India and China will • Potential for future margin erosion in LED lighting
provide opportunities to drive top line growth in all sectors • Slowdown in growth in developed and developing economies
• Strong focus on environmentally friendly products exposes • Overpaying for acquisitions, as they have in the past
Philips favourably to a growing emphasis on energy • Healthcare exposure to reduced government spending – 41%
conservation of total profits
• Strong net cash position supports aggressive expansion via
• New management team set to take over in April 2011
Ownership and Management
Key Issues Commitment to Shareholder value
• In the process of a management shake-up which has been a • Management has reaffirmed its commitment to creating
major headwind for the share price, due to uncertainty. New shareholder value into the future, and there is widespread
CEO to begin n April 2011. expectations from brokers that this will involve share-buy-backs or
• Company currently involved in a share-buy-back program, dividend increases.
which is currently suspended, and this would allow for • The company is currently involved in a €5bn share-buy-back
increased shareholder value. programme, which was suspended in January., and there is €1,.7bn
• Management has been restructuring its portfolio through remaining. In the period 2005-2008 the company repurchased
disposals, where the proceeds have been re-invested in its 28% of outstanding equity.
three operating segments of the group. • With the strong balance sheet Philips, the proceeds from cutting
• In the downturn Philips’ management managed to reduce fixed costs and disposals, and a healthy dividend cover of 2.6x there is
costs by 2.5% of sales . They have further restructuring charges large scope to increase dividends.
of €200m guided for 2010, which suggests there will be • That said Philips’ is looking to drive top-line growth in increase
additional savings in 2011. market share, particularly in emerging markets.
Management Restructuring Value of the Philips brand
• The Current CEO Kleisterlee is set to retire in this spring. He • A significant amount of sales comes from the brand alone, through
will be succeeded by Frans Van Houten, who took up the COO the three main operating segments.
position in January. • With a 7% brand value increase in 2010, Philips outpaced the
• Van Houten has a strong record in Philips but as a restructurer average increase of 4%shown by other brands.
his appointment has been considered a surprise to many due to • 78% of employees are proud to work for Philips
Philips’ commitment to a growth strategy.
• There is a number of management shake ups taking place in
the company. The widely popular CFO Sivignon will step down,
as will the head of consumer lifestyle Andrea Ragnetti.
• Much of these management issues have been a headwind to
the share price, due to uncertainty, but with the new team to
be in place in April 2011 we see this being a positive for the
Source: Q3 results presentation
Board of Management Pierre-Jean Sivignon
CFO, Executive Vice President, Member of the Group Management Committee
The executive management of Philips is entrusted to its Board of Management Mr. Sivignon is CFO, Executive VP, Member of the Group Management
under the chairmanship of the President/CEO and consists of at least three Committee of Philips since May 1, 2005. After graduating Mr. Sivignon
members (currently five). The members of the Board of Management have enrolled in the French Navy in 1978. Upon completion of his military
collective powers and responsibilities. They share responsibility for the service, he took a position as External Auditor for the firm of Peat
management of the Company, the deployment of its strategy and policies, and the Marwick Mitchell and worked there until 1982. From 1982 to 2001, he
achievement of its objectives and results. worked for the Schlumberger Group. In 2001 he moved to Faurecia SA to become CFO.
He joined Philips' Board of Management in May 2005, becoming the Group’s Executive
Gerard Kleisterlee VP and CFO.
President & CEO, Chairman of the Management Board, Chairman of the
Executive Vice-President and CEO Philips Healthcare
Mr. Kleisterlee has been Chairman of the Board of Management,
Mr. Rusckowski is Executive VP and CEO of Philips Healthcare since
President/CEO and Chairman of the Group Management
April 2007. Before joining Philips, Mr. Rusckowski held numerous
Committee of Philips since April 30, 2001. He joined Philips'
management positions with the healthcare division of Hewlett-
Medical Systems division in 1974, where he held a number of
Packard/Agilent Technologies. He was General Manager of Agilent’s
positions. From 1981 to 1986 he was General Manager of Philips’
Healthcare Solutions Group when Philips
Professional Audio Product Group. Mr. Kleisterlee joined Philips Components in
acquired this business in 2001. Mr. Rusckowski was previously CEO of the Imaging
1986 as Industrial Director for Display Components and was appointed Managing
Systems business group of Philips Medical Systems. Mr. Rusckowski was appointed CEO
Director of Philips Display Components worldwide in 1994. In2001, he was
of Philips Medical Systems and Member of the Group Management Committee on
appointed President & CEO of Philips and Chairman of the Board of Management
November 1, 2006. On April 1, 2007 he became Member of the Board of Management.
and the Group Management Committee.
Mr. Rusckowski holds a Bachelor of Science in Mechanical Engineering from Worcester
Polytechnic Institute and a degree in management science from the MIT.
Executive Vice President & Member of the Management Group Committee Rudy Provoost
Dr. Dutine is Executive VP is a Member of the Group management Executive Vice-President and CEO Philips Lighting, Member of the Group Management
Committee of Philips since March 28, 2002. Dr. Dutine began his Committee
industrial career in 1979 at Rockwell-Collins GmbH in Frankfurt, Mr. Provoost is Executive VP and CEO Philips Lighting of Philips since
where he was appointed Director of Engineering. In 1984 he April 2008. He is Member of the Board of Management since April
joined Motorola Inc and became Group Director Product 2006, and Member of the Group Management Committee since
Operations of its European Communications Group. In 1989 he moved to Robert August 2003. Mr. Provoost began his career in 1984 with Procter &
Bosch GmbH in Stuttgart where he served as President and CEO of the Mobile Gamble in Management Systems 1987, he joined Canon Belgium .In
Communications Division. Dr. Dutine joined Philips as of February 1, 2002 and was 1989, he was appointed GM Marketing for all business operations. In 1992, Mr.
appointed Member of the Board of Management as per March 28, 2002. Dr. Provoost joined Whirlpool as MD for Belgium. He was named VP Consumer Services for
Dutine holds a diploma in Electrical Engineering and a Ph.D. in Communications Europe in 1993, and became senior officer of Whirlpool Corporation and, successively,
Technology from the University of Darmstadt, Germany. Vice President Group Sales in 1994, VP Group Marketing and VP Whirlpool Brand Group
for Europe. In October 2000, he joined Philips as Executive VPof Consumer Electronics.
He was appointed CEO of Global Sales and Services for Consumer Electronics, as well as
Senior VP in August 2003
New Additions to the Management Team
Frans van Houten Ron Wirahadiraksa
Nominated as President/Chief Executive Officer (CEO) and Chairman Nominated as Chief Financial Officer (CFO) and member of the Board of
of the Board of Management, effective April 2011 Management, effective April 2011
Frans van Houten started his career with the Ron Wirahadiraksa is Executive Vice President and
company in 1986 in marketing and sales at Chief Financial Officer of Philips Healthcare.
Philips Data Systems and held several leadership Before joining Philips in 2008, Mr. Wirahadiraksa was
positions within the company. He became CEO President and Chief Financial Officer of LG.Philips
of Airvision, an in-flight entertainment startup LCD. As Joint Representative Director he was also an
in the United States in 1992, and was appointed Executive Member of the Board of Directors.
vice president international sales and While at LG.Philips LCD, Mr. Wirahadiraksa established
operations of Philips Kommunikations Industrie the Chief Financial Officer position and Investor
in Germany in 1993. In 1996 Mr. van Houten joined Philips’ Consumer Relations function. He led the 2004 IPO at the NYSE and KSE and other major
Electronics division for which he led the region Asia Pacific, Middle East funding transactions, handled several multi-billion dollar capital expenditure
and Africa, based in Singapore. projects and supported the significant growth and market leadership of the
In 2002, he became co-CEO of the Consumer Electronics division and was company.
appointed member of Philips’ Group Management Committee in 2003. In
2004, Mr. van Houten was appointed CEO of Philips Semiconductors and Prior to LG.Philips LCD, Mr. Wirahadiraksa held financial executive roles for
in 2006 joined Philips’ Board of Management until the spin out and Philips in various businesses and regions, including Vice President and Chief
creation of NXP Semiconductors in September of that year. Prior to re- Financial Officer of the Philips Flat Display Systems business group.
joining Philips, Mr. van Houten was leading a project to separate ING
Group’s banking and insurance operations as an independent advisor to Mr. Wirahadiraksa graduated with a Doctoral in Business Economics from The
ING’s management board. Free University of Amsterdam, the Netherlands. He also graduated as a
Certified Registered Controller.
Mr. van Houten was born in the Netherlands in 1960 and holds a Masters
degree in Economics and Business Management from the Erasmus Mr. Wirahadiraksa will succeed Pierre-Jean Sivignon per March 31, 2011 as the
University in Rotterdam, The Netherlands. Chief Financial Officer of Royal Philips Electronics.
Mr. van Houten is a member of the European Round Table of
Industrialists since October 2010.
On July 8, 2010, Philips announced Mr. van Houten as its next President
and CEO, succeeding Mr. Gerard Kleisterlee in April 2011.
As of January 1, 2011, Mr. van Houten assumed the position of Chief
Operating Officer (COO) within Philips.
Why we are looking to add Philips to our portfolio
• We are looking to add Philips to our portfolio with a 12 month target price of €29.00, below the €30.50 JPM and €34.00 Goldman
• With a low beta, high dividend yield and strong balance sheet Philips fits perfectly as a core component of our buy-and-hold
portfolio. The strong balance sheet allows for potential increase in dividends/share buy-backs
• Currently trading at a low valuation (P/E at 12.6x) to peers and historic multiples, Philips seems to be a good value stock to add to
• As a leader many of its market segments, Philips offers us a low downside risk, high market cap investment.
• Philips is posed to benefit from the improvement in the macroeconomic outlook. It has significant exposure to EM (32%), where
most growth comes from. Germany (a core market) has likewise proved resilient and is expected to maintain its recovery
• Brokers note that the peers that are exposed to positive trends are trading at a premium to Philips. These trends include the EM
exposure and the investment in LED and energy efficiency, along with the recovery in non-residential construction.
Short-Term Catalysts Upcoming News Flow
• Philips has underperformed the market and much of its peers. It
has underperformed the S&P by 13% in the last 6 months. We feel • Fourth quarter and annual results 2010
this is due to a number of headwinds which are now disappearing. -24th January 2011
• There a number of catalysts which could be a significant driver of
the stock price in the coming months, such as Q4 results, where • Release of annual report 2010
analysts expectations are conservative, and the replacing of -17th February 2011
management. • Frans Van Houten takes over as CEO
• The changeover of management has created significant
- April 2011
uncertainty in the company lately but we believe that worries are
overdone as the new management is ready. •Q1 Results 2011
• Further broker upgrades are likely with the improvement of macro - 18th April 2011
conditions and the likelihood of increase in dividends or buybacks
Source: Philips Investor Relations
Siemens (Frankfurt) Hitachi (NYSE-ADR)
• Siemens AG is engaged in electronics and electrical • Hitachi, Ltd. (Hitachi) is engaged in developing a
engineering. diversified product mix ranging from electricity
• Siemens operates in six segments: Industry, Energy, generation systems to consumer products and
Healthcare, Equity Investments, Siemens IT Solutions and electronic devices.
Services and Siemens Financial Services (SFS). • The Company operates in 11 segments: Information &
Telecommunication Systems, Power Systems, Social
Infrastructure & Industrial System, Electronic Systems
& Equipment, Construction Machinery, High
Functional Materials & Components, Automotive
Systems, Components & Devices, Digital Media &
Consumer Products, Financial Services and Others.
General Electric (NYSE) Schneider Electric (Paris)
• General Electric Company (GE) is a diversified technology, • Schneider Electric SA is a France-based company
media and financial services company. that specializes in electricity distribution and
• The Company operates through five segments: Energy automation management.
Infrastructure, Technology Infrastructure, NBC Universal • The Company has eight segments: Automation and
(NBCU), Capital Finance and Consumer & Industrial. Control, Electrical Distribution, Installation Systems
& Control, Building Automation & Security, Critical
Power & Cooling Services, Restriction of Hazardous
Substances (RoHS) Compliance, Services, Training.
Discounted Cash Flow
Source: Philips Annual Report
Comparable Company Analysis
Price to: Enterprise Value:
LTM EPS 2010E EPS 2011E EPS 2012E EPS 2009A EBITDA 2010E EBITDA 2011E EBITDA 2012E EBITDA
Siemens 20.07 x 16.63 x 13.85 x 12.04 x 11.94 x 8.75 x 7.77 x 6.88 x
Hitachi 11.34 x -18.99 x 9.43 x 9.00 x 2.22 x 2.58 x 1.90 x 1.73 x
General Electric 20.33 x 17.48 x 14.50 x 12.06 x 27.12 x 27.10 x 27.10 x 27.10 x
Schneider Electric 24.37 x 17.93 x 14.37 x 12.89 x 17.14 x 12.18 x 10.43 x 9.65 x
Mean 19.02 x 8.26 x 13.04 x 11.50 x 14.61 x 12.65 x 11.80 x 11.34 x
Median 20.20 x 17.05 x 14.11 x 12.05 x 14.54 x 10.47 x 9.10 x 8.27 x
High 24.37 x 17.93 x 14.50 x 12.89 x 27.12 x 27.10 x 27.10 x 27.10 x
Low 11.34 x -18.99 x 9.43 x 9.00 x 2.22 x 2.58 x 1.90 x 1.73 x
Koninklijke Philips 18.35 x 12.76 x 12.30 x 10.94 x 22.91 x 9.08 x 8.28 x 7.45 x
2009 2010A/E 2011E 2012E
Siemens 13.04% 13.19% 14.84% 16.40%
Hitachi 7.60% 7.27% 9.54% 10.07%
General Electric 13.38% 14.00% 14.52% 14.53%
Schneider Electric 12.94% 15.15% 16.27% 16.78%
Mean 11.74% 12.40% 13.79% 14.45%
Median 12.99% 13.59% 14.68% 15.47%
High 13.38% 15.15% 16.27% 16.78%
Low 7.60% 7.27% 9.54% 10.07%
Koninklijke Philips 4.53% 10.36% 10.94% 11.57%
5 Year Income Statement
12/31/09 12/31/08 12/31/07 12/31/06 12/31/05
Net Sales or Revenues 23189.00 26385.00 26793.00 26976.00 30395.00
Cost of Goods Sold 13215.00 16425.00 16762.00 17821.00 19011.00
Depreciation, Depletion & Amortization 1348.00 1094.00 788.00 764.00 1456.00
Gross Income 8626.00 8866.00 9243.00 8391.00 9928.00
Selling, General & Admin Expenses 7524.00 7894.00 7437.00 7293.00 8428.00
Operating Expenses - Total 22099.00 25413.00 24987.00 25878.00 28895.00
Operating Income 1090.00 972.00 1806.00 1098.00 1500.00
Non-Operating Interest Income 45.00 140.00 236.00 490.00 99.00
Earnings Before Interest And Taxes 745.00 338.00 4744.00 1556.00 2176.00
Interest Expense On Debt 297.00 246.00 279.00 339.00 289.00
Pretax Income 448.00 92.00 4465.00 1217.00 1887.00
IncomeTaxes 100.00 286.00 622.00 137.00 586.00
Minority Interest 14.00 3.00 5.00 4.00 31.00
Equity In Earnings 76.00 19.00 763.00 157.00 1681.00
Net Income Before Extra 410.00 179.00 4601.00 919.00 2868.00
Extr Items & Gain(Loss) Sale of Assets 0.00 7.00 433.00 4464.00 0.00
Net Income Before Preferred 410.00 186.00 4168.00 5383.00 2868.00
Preferred Dividend Requirements 0.00 0.00 0.00 0.00 0.00
Net Income Available to Common 410.00 179.00 4601.00 919.00 2868.00
Source: Thompson Banker One
5 Year Balance Sheet
ASSETS 12/31/09 12/31/08 12/31/07 12/31/06 12/31/05
Cash And ST Investments 4,679.00 3,994.00 9,044.00 6,513.00 5,436.00
Receivables (Net) 3,983.00 4,289.00 4,670.00 4,773.00 5,155.00
Total Inventories 2,913.00 3,371.00 3,203.00 2,880.00 3,480.00
Other Current Assets 0.00 837.00 568.00 508.00 723.00
Current Assets - Total 11,909.00 12,866.00 17,831.00 14,962.00 15,106.00
Property Plant & Equipment - Net 3252 3484 3180 3099 4893
Total Investments N/A N/A N/A N/A N/A
Other Assets 13,066.00 14,473.00 9,208.00 8,044.00 5,755.00
Total Assets 29,284.00 32,488.00 35,372.00 37,353.00 32,338.00
LIABILITIES & SHAREHOLDERS' EQUITY 12/31/09 12/31/08 12/31/07 12/31/06 12/31/05
Accounts Payable 2,775.00 2,992.00 3,372.00 3,450.00 3,550.00
ST Debt & Current Portion of LT Debt 627.00 717.00 2,345.00 863.00 1,167.00
Income Taxes Payable 118.00 152.00 155.00 640.00 551.00
Other Current Liabilities 3,780.00 4,276.00 2,981.00 3,191.00 3,963.00
Current Liabilities - Total 8,050.00 8,928.00 9,633.00 9,130.00 10,375.00
Long Term Debt 3,640.00 3,441.00 1,212.00 3,006.00 3,320.00
Other Liabilities 1,929.00 991.00 585.00 741.00 1,044.00
Total Liabilities 14,640.00 16,199.00 13,646.00 14,225.00 15,340.00
Minority Interest 49.00 46.00 42.00 131.00 332.00
Preferred Stock 0.00 0.00 0.00 0.00 0.00
Common Equity 14,595.00 16,243.00 21,684.00 22,997.00 16,666.00
Retained Earnings 15,947.00 20,577.00 25,559.00 22,085.00 21,710.00
Total Liabilities & Shareholders' Equity 29,284.00 32,488.00 35,372.00 37,353.00 32,338.00
Source: Thompson Banker One
Bull and Bear Case
€31.50 €28.42 €22.5
[+29%] [+17%] [-8%]