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Tickers in this Article: PHG, SNE, PC
Royal Philips Electronics N.V. (NYSE:PHG), the Dutch giant in the electronics and lighting industry, suggested dimmer prospects for near-term growth than it had recently forecast and announced that there would be an earnings shortfall for the final quarter of the year. The mid-quarter announcement altered the original projections that had the company growing steadily from 2008 into 2009 and beyond. Despite the news, after a slight initial drop in the stock price, Philips stock stayed even and gained a bit on the NYSE.

A Confluence of Things Gone Wrong
Philips, well-known as the leader in consumer electrical lighting, is not as well known by the public for its role in industrial and commercial lighting. It is heavily involved in the automobile and construction industry, which have been hard hit by the global economic downturn. These segments of business, as the company reported, were hurt by the unusual severity and concentration of the economic downturn, which should continue into early 2009.

Some Segments Lagging Behind
The consumer electronic lighting segment was affected also, as was the medical segment of Philips' business, which consists of medical imaging and treatment devices. The weakness at the end of 2008 in these segments is also expected to continue into 2009, with the economic uncertainty causing Philips to scale back its expectations. Philips will take a number of non-cash write downs, totaling roughly $1.5 billion, the largest of which should be more than $1 billion for its stakes in LG Display and the divestiture of its former software segment, NXP. It expects to record its first quarterly loss since 2003.

Putting the Downgrade in a Better Light
While Philips has stated these cautionary revised projections, it pays to examine the benchmark against which their original projections were made. Philips had been shooting for doubling of earnings before interest, taxes, depreciation and amortization (EBITDA) by 2010. This would have necessitated a far more positive business climate to generate such lofty top-line revenue growth, a requisite to hit the goals, so the diminished projections should be seen in that light. Philips may eventually turn in respectable earnings numbers, especially considering the global economic conditions right now. (To learn of some of the benefits and drawbacks of using this measure, read A Clear Look At EBITDA.)

Also, Philips has suffered, as have all international conglomerates, from the secular spread of the economic recession, just like its competitors Sony Electronics (NYSE:SNE) and Panasonic (NYSE:PC). But with its $17 billion market cap and the strength of its healthy, wide-ranging business profile, Philips should be positioned to respond favorably as soon as the economic downturn is reversed.

The Future looks Bright
That the stock price barely fell and remained solid in a troubled market, despite the dismal earnings projection, says something about the long-term core strength and future of Philips Electronics. The company has two segments, consumer electronics and medical, which should not be as impaired economically going forward as the industrial and commercial segments. The consumer and medical segments may also respond first to any reviving in the economy. So, don't expect a quick bounce for the stock, but despite the announcement of the profit lights dimming for the near term, pay attention to this strong company with its tremendous fundamentals. At signs of a rebound in its business prospects, whether early or later next year, expect the stock to rebound, too.

For related reading, see What Are Fundamentals?

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