Although Dutch conglomerate Philips (NYSE:PHG) has bounced off the late 2008/early 2009 bottom in the stock, it has been many years since Philips was really a credible candidate for a long-term investor. Once an unquestioned leader in lighting and a strong competitor in consumer electronics, Philips has fallen victim to the bloat and malaise that seems to affect almost every conglomerate sooner or later. The question for investors now, though, is how long they are willing to wait for real signs of a new way of doing business at this company.

TUTORIAL: Economic Indicators To Know

Weak Guidance Hamstrings the Stock
Philips surprised the market by preannouncing a disappointing second quarter. Management was sparse on details, but sales in the core lighting business only grew in the low single digits, while sales in consumer electronics have fallen from last year's level on weakness in Europe and a restructuring of the TV business.

Oddly, the company said nothing about the health care business, which is a substantial factor in sales and profits. That said, based on the performance at competitors like General Electric (NYSE:GE), Siemens (NYSE:SI), Varian (NYSE:VAR), Hologic (Nasdaq:HOLX) and ZOLL (Nasdaq:ZOLL), it would seem credible that Philips had a good, but probably not spectacular, quarter.

All in all, then, it is hard to forecast just what sort of numbers Philips might report. That may be part of the reason behind the harsh reaction in the stock market (which sent the stock down 10% after the announcement). More to the point, it's an incredibly sloppy move on the part of management to basically yell "Fire!" without following up with details.

Can Philips Make These Assets Work?
If Philips wants to enjoy a turnaround comparable to that of Siemens, the company has some work to do. Lighting, for instance, has turned into a tough business as the transition to LED has not quite worked out as expected for Philips, Siemens, General Electric or Cree (Nasdaq:CREE). While Philips continues to spend large sums of money in R&D, its large conglomerate rivals seem to be more focused on stripping costs out of existing technology. (For related reading into R&D, see Buying Into Corporate Research & Development (R&D).) It is also worth noting that Siemens is looking to spin off Osram - not exactly a vote of confidence for the lighting market.

If maintaining profitable leadership in lighting has proven difficult, consumer electronics risks becoming an albatross. More and more, Philips seems to find it hard to compete with Asian rivals like Samsung, LG, Funai, Sharpe, Sony (NYSE:SNE) and Techtronic (Nasdaq:TTNDY). Philips has a great history here, including being on the leading edge of technologies like CDs, DVDs, and Blu-Ray, and growth in areas like Personal Care has been solid, but the overall business has struggled to hold up against rivals with better cost structures.

Waiting For the Real Restructuring
Siemens was once in a position not all that dissimilar to Philips and plenty of investors wrote it off as hopeless. Fortunately for the company, they tapped the right people for senior management, made some tough choices, and started demanding better performance from their units. The result has been a very solid market performance in recent years.

This could happen for Philips too, but the emphasis has to be on "could" at this point. Philips hired a CEO (van Houten) with a reputation as a restructuring specialist, but there have been rather few details about whether Philips is going to get its house in order. More than anything, the company needs to balance the brand rewards of being a technology and innovation leader with the economic realities of returns on capital. This will entail more than just firing people and looking to wring costs of the system; if Philips does not lay out a vision to fundamentally transform its operating philosophy, there is no reason to own the stock other than as a value trade.

The Bottom Line
Absent that new vision for the company, there is no compelling reason to own Philips stock today. The company is cheap relative to its prospects, but there has to be serious doubt in the mind of rational investors about whether the company can realize the value of those prospects. For now, then, Philips is a wait-and-see and a ripe candidate for a solid turnaround plan.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center